What’s behind stronger than expected growth in China?

This article first appeared on The Financial Times. 

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China’s stronger than expected growth figure announced on Monday will save Xi Jinping’s blushes as he tours the UK this week and suggests the country’s economic rebalancing is largely on track — a view that has been challenged by some analysts over recent months.

Gross domestic product grew 6.9 per cent in the third quarter, down from 7 per cent in the first and second but still within range of the official full-year target of “around 7 per cent”. More importantly, the composition of growth continued to shift in the desired direction of policymakers: towards consumption and services and away from manufacturing and investment.

“Chinese rebalancing is at a pivotal moment. Should it fail the global economy, it could be pushed into a major downturn,” wrote Angus Nicholson, a market analyst at IG.

Consumption accounted for 58 per cent of that growth, or 4 percentage points. Investment, which includes construction of new houses and factories, contributed only 43 per cent, or 3 percentage points. Services, whose share of overall output passed 50 per cent this year, grew 8.6 per cent, well ahead of the 5.8 per cent expansion in the struggling industrial sector.

Analysts say rising incomes amid a still-tight labour market are fuelling consumption.

“The consumption share of GDP is bigger and bigger because ordinary people’s share of national income is higher and higher,” Huang Yiping, professor at Peking University’s China Center for Economic Research, told local media on Monday. Mr Huang sees telecommunications, education, travel, elderly care and financial services as sectors likely to benefit most from increasing consumption.

Yet for analysts sceptical of China’s official GDP data, the latest figures compound that suspicion. They doubt that services could have remained so strong given the steep declines in the stock market in the second quarter. Financial services were the biggest contributor to services growth earlier in the year.

“It is somewhat puzzling how the service sector maintained strong growth in the third quarter, given that the strong service sector growth in the first half was mainly driven by the financial sector,” wrote Zhu Haibin, chief China economist at JPMorgan. “The recent stock market correction should have led to service sector deceleration.”

The statistics bureau is expected to provide a more detailed breakdown of service sector growth later this week. Julia Wang, greater China economist at HSBC, notes that the recovery of property sales during the third quarter likely drove growth in related services like real estate agents.

If services did not grow as fast as official data claim, that implies the slowdown in manufacturing hit the overall economy faster than the mild slowdown in the headline figure — to 6.9 per cent from 7 per cent in the first half and 7.3 per cent in 2014 — indicates.

There is no question that the traditional mainstays of China’s economy are struggling. Factory output grew at a disappointing 5.8 per cent in September, barely above the six-year low of 5.7 per cent touched in March.

Fixed-asset investment, which includes construction of housing, expansion of factory capacity and infrastructure, grew at 10.3 per cent in the year to September, the slowest pace since 2000.

Even if services are growing as fast as official data suggest, that is cold comfort to commodity exporters who rely on Chinese demand for oil, iron ore and base metals. Relief for those sectors now depends on further stimulus measures.

Stimulus policies are already in the pipeline. Bank lending to the real economy accelerated sharply in September, and economists forecast another interest rate cut before the end of the year. They also expect the central bank to reduce the share of deposits that banks must hold in reserve at the central bank, which frees up more funds for lending.

The National Development and Reform Commission, the powerful state planning agency, has also ramped up spending on infrastructure to cushion the slowdown in investment in property and factory plant and equipment.

“Policymakers are signalling that they are serious about defending 7 per cent growth target,” Larry Hu, China economist at Macquarie Securities, wrote on Monday.

Additional reporting by Ma Nan

This article first appeared on The Financial Times. Publication does not imply endorsement of views by the World Economic Forum.

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