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Instant View: China's economic recovery quickens in third quarter but misses forecasts

(Reuters) - China’s economic recovery accelerated in the third quarter as consumers shook off their coronavirus caution, however, overall growth missed forecasts pointing to persistent challenges for one of the world’s few current engines of demand.

Workers are seen at a construction site in Beijing, China, October 19, 2020. REUTERS/Tingshu Wang

Gross domestic product (GDP) grew 4.9% in July-September from a year earlier, official data showed on Monday, slower than the median 5.2% forecast by analysts in a Reuters poll and following 3.2% growth in the second quarter.

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KEY POINTS

- Q3 GDP +4.9% y/y (f’cast +5.2%, Q2 +3.2%)

- Q3 GDP +2.7% q/q (f’cast +3.2%, Q2 +11.5%)

- September industrial output +6.9% y/y (f’cast +5.8%, Aug +5.6%)

- September retail sales +3.3% y/y (f’cast +1.8%, Aug +0.5%)

- Jan-Sept fixed asset investment +0.8% y/y (f’cast +0.8%, Jan-Aug -0.3%)

MARKET REACTION

China's major indexes erased some gains following the GDP data, with the benchmark Shanghai index .SSEC trading 0.6% higher and the CSI300 index .CSI300 up 0.8% after rising as much as 1% and 1.2%, respectively.

COMMENTARY:

ZHANG YI, CHIEF ECONOMIST, ZHONGHAI SHENGRONG CAPITAL MANAGEMENT, BEIJING

“Before the data release, the market expected Q3 GDP growth to top 5%, but given the slow recovery in the services sector, which already accounts for over 50% in GDP, Q3 GDP data came in a bit below market consensus.

“But the rebound in retail sales and export orders suggest the GDP would likely grow above 6% in the fourth quarter.”

NIE WEN, ECONOMIST, HWABAO TRUST, SHANGHAI

“Exports and property-related sectors are faring quite well, while consumption lags behind a bit. Growth in the industrial output has even rebounded to a level higher than last year’s, mostly due to robust exports. Retail sales were still down in the first three quarters, but are expected to further pick up in the coming months.

“We expect the GDP to expand by 5.5%-5.8% in the fourth quarter, bringing the full-year growth to about 2%.

“At this stage, people have not been able to feel the economic pains, mostly due to the fact that COVID-19 has been under control in China for quite sometime, which has led to global demand being supplied by China. But this is only temporary. Once the global pandemic gets under control and global production gradually resumes, China’s economic sluggishness may only become pronounced then.”

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

“We think growth will continue to pickup in the near term. Fiscal policy is set to remain supportive until at least the start of next year, which should keep activity in the industry and construction strong. Meanwhile, tightening labour market conditions and improving consumer confidence mean that the recovery in consumption and services activity probably has further to run.”

LOUIS KUIJS, HEAD OF ASIA ECONOMICS, OXFORD ECONOMICS, HONG KONG

“China’s GDP grew 4.9% y/y in Q3, or 3.0% quarter-on-quarter, in our estimation. Year-on-year growth was up from 3.2% in Q2, showing that the economic recovery from COVID-19 continues, led by strength in industry driven by robust investment and exports. But the GDP growth was lower than our forecast of 5.3% y/y, reflecting slowing infrastructure investment growth and lingering softness in corporate investment and consumption.

“We expect sequential (QoQ) GDP growth to ease further in Q4, led by a softening of investment momentum as credit growth decelerates. Household consumption should return to growth in Q4 from a year ago and become a more important growth-driver next year than in 2020. The slight disappointment in Q3 leads us to nudge down our forecast for overall GDP growth in 2020 to 2%, from 2.3%. We keep our forecast for 2021 GDP growth unchanged at 7.6%.”

KAKU EI, SENIOR CURRENCY STRATEGIST, NOMURA SECURITIES, TOKYO

“Although the headline GDP figure was a bit weaker than expected, industrial production was better than expected and retail sales also showed a recovery.

“Earlier, the economy was led more by infrastructure spending but considering the strength of exports etc. there appears little to worry about the economy except for the real estate sector, which could feel the pinch from policy tightening on the sector.

“The yuan is likely to remain supported, though Beijing probably wants it to be steady around the current levels before the U.S. election. The yuan could rise to 6.4-6.5 per dollar if Biden wins the election.”

BEN POWELL, APAC CHIEF INVESTMENT STRATEGIST, BLACKROCK INVESTMENT INSTITUTE, SINGAPORE

“This is further evidence of China’s economic V-shaped recovery. China has grown in the first three quarters of the year, so fully recouped the damage from the first half of the year in the midst of the virus. The data today is further evidence that recovery is broadening and deepening. I thought the strong, or stronger than expected, retail sales figure was evidence that the consumer is regaining confidence in their employment situation and more broadly perhaps, aligned with the 650 million people travelling during the Golden Week, recovering confidence in simply going back out into shopping malls, airplanes restaurants and so forth. So, for me, and for us at the BlackRock Investment Institute, this data was encouraging and supportive of our narrative which is that China continues to recover and that is likely to continue in the quarters moving forward.

“The recovery continues to broaden and deepen and, interestingly, China has a dramatically different policy setting from many other parts of the world. In many other parts, we talk about a policy revolution ... But in China, we have an ongoing, much more historically orthodox approach to policy with interest rates, both real and nominal, by global standards being very very high around 3%.

“Next week is the fifth plenum, which is extremely important in setting out not just the economic direction for the next year, but will give us the first kind of blueprint for the 14th Five-Year Plan. So, it’s very likely that policymakers will want to fully digest this document which won’t be formally released until March of next year, and continue to move forward with a prudent balanced neutral policy approach for the next several months and even quarters.

TOMMY XIE, HEAD OF GREATER CHINA RESEARCH, OCBC BANK, SINGAPORE

“I am not worried. If you look at the Q/Q growth, 3.2% is still very nice. This is after Q2’s 11.5% Q/Q recovery.

“Retail sales are strong. I think the domestic demand story is not that convincing yet, but at least we started to see the rising interest in big ticket items.

“The recovery of infrastructure investment will further underpin China’s recovery in the coming quarters. If we look at the bond issuance by local government in the past few months and strong M2 growth in September, I think infrastructure investment will pickup further. Secondly, it is also due to the base effect. Q1 2021 growth will be very strong, easily (hitting) double digit Y/Y growth.”

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“The 4.9% (GDP growth) was spot on for us. But previously, we were expecting fourth-quarter growth to be about 5.7% and if you look at the trajectory of the domestic demand recovery, I think above 6% should be in line. So for the full year, 1.9% is around the growth that we’re going to see for China this year.

“This will be driven by the tertiary industry. Industrial production has already recovered so much, and growth for the secondary industry is already the strongest since the first quarter of 2019. So, I think in the fourth quarter, you could see some of this easing.

“We don’t see the prospects of further interest rate cuts in China now. They will maintain support to the SMEs, and I think the focus is now on stimulating domestic demand.”

LARRY HU, HEAD OF CHINA ECONOMICS, MACQUARIE CAPITAL, HONG KONG

“I think it’s a pretty strong reading compared to ... the second quarter. So, the recovery continues and in the fourth quarter we’re going to see it accelerate to maybe 5.5%, and then maybe 15% in the first quarter next year because of a very, very low base this year.

“If you look at monthly data in industrial production, retail sales — all point to a pretty strong recovery. And it also tells us that the engine of the recovery is changing because in the second quarter and third quarter, the recovery was largely driven by what I would call 50% of the economy, investment, exports. From now on, it is going to be driven more by the other 50% of the economy, especially consumption. So that’s why you see in the September data, retail sales actually beat consensus by a large margin.

“We already know something about the October data: Golden Week consumption was also pretty strong. So, in October, we’re going to see consumption, retail sales continue to accelerate for sure.

“The single most important thing for the Chinese economy in the coming months is whether service consumption can catch up.”

YOSHIKIYO SHIMAMINE, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO

“The GDP numbers came in slightly below expectations, but the monthly data shows there is no reason to be overly pessimistic.

“China’s economy remains on the recovery path, driven by a rebound in exports. Consumer spending is also headed in the right direction, but we cannot say it has completely shaken off the drag caused by the coronavirus.

“The problem is the labour market and wages remain a little weak, and this is holding back consumption.

“China needs to continuously roll out more policies to support domestic demand.

“There is a risk that the return of lockdowns in Europe and another wave of infections in the United States will hurt consumer spending and trigger more job losses, which would be a negative for China’s economy.”

IRIS PANG, CHIEF CHINA ECONOMIST, ING, HONG KONG

“I don’t think the headline number is bad, it’s just short of consensus. People are focused on the recent recovery.

“Job creation in China is quite stable, which creates more consumption because more people have jobs... what China calls ‘internal circulation’ is actually working.

“People who have jobs and can hold on to jobs actually don’t have any issues at all... I believe there will be no action from the PBOC, just on and off liquidity injection through daily operation. I think China does not need a new set of stimulus, unlike the U.S. or Europe, but more focused-based stimulus, like how to help those still jobless.”

FRANCES CHEUNG, HEAD OF MACRO STRATEGY FOR ASIA, WESTPAC, SINGAPORE

“The rebound in Q3 GDP was less strong than expected, but was still a decent 4.9% YoY. September data beat expectations, suggesting a pickup in momentum towards the latter part of Q3. The industrial production rose 6.9% YoY, even the lagging retail sales were up by 3.3% YoY and fixed-asset investment returned to growth of 0.8%. The pickup in momentum was broad-based, which bodes well for the Q4 outlook.”

BACKGROUND:

- The novel coronavirus first emerged in China last December. Tough lockdown measures to contain it brought economic activity to a near halt early this year, resulting in a 6.8% decline in GDP in the first quarter — the first contraction since at least 1992 when official quarterly GDP records started.

- China’s economy grew 3.2% in the second quarter from a year earlier, as lockdown measures ended and policymakers stepped up stimulus to combat the shock from the crisis.

- The pandemic is now largely under control, although there has been a small resurgence of cases in the eastern province of Shandong.

- Policymakers globally are pinning their hopes on a robust recovery in China to help restart demand as economies struggle with heavy lockdowns and a second wave of infections.

- China’s retail spending has lagged the comeback in factory activity as heavy job losses and persistent worries about infection kept consumers at home.

- In September, auto sales marked a sixth straight month of gains with a solid 12.8% growth. Domestic passenger flights in September, meanwhile, beat their COVID-19 levels, indicating that sector was approaching a full recovery.

- While the central bank stepped up policy support earlier this year after widespread travel restrictions choked economic activity, it has more recently held off on further easing.

- The government has rolled out a raft of measures, including more fiscal spending, tax relief and cuts in lending rates and banks’ reserve requirements, to revive the virus-hit economy.

Reporting by Asian bureaus; Compiled by Uttaresh.V

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