There is a clear need for additional policy support, from monetary and fiscal authorities.

China GDP disappointed in the September quarter, annual growth slowing to 6.0%yr rather than the 6.1%yr consensus expectation. This outcome is at the lower-bound of authorities 6.0–6.5% growth guidance for 2019.

By sector, the deceleration (unsurprisingly) came as a result of weakness in the secondary sector (manufacturing and construction). Nominal annual growth in this sector has halved from 10.0% a year ago to 5.0% currently. While recent PMI readings suggest a base may be forming, growth in this part of the economy is set to remain weak for some time.

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The external environment is not the only factor suppressing growth here. As we have repeatedly noted, domestic investment is also a headwind. This was again confirmed by today’s fixed asset investment data which, at the margin, also disappointed, coming in at 5.4%ytd (consensus 5.5%ytd).

Investment growth in the manufacturing sector has been weak throughout 2019 after a fleeting surge in late-2018. Utilities and transport spending is also struggling to accelerate from historically weak levels. This is despite significant political and financial support for local government authorities in 2018/19.

Partially offsetting this entrenched weakness is strong real estate investment growth. Whereas private non-residential businesses are struggling to gain funding, households (and therefore property developers) have easy access. Thankfully, based on available house price data, new housing activity is concentrated in Tier 2 and 3 cities – where economic progress is most needed – rather than the developed Tier 1, where speculation is often more prevalent.

While GDP growth in the tertiary sector is yet to be materially affected by the weakness in manufacturing and construction, arguably the composition of growth in the sector has shifted. In short, real estate and financial sector activity is likely contributing disproportionately as consumer spending is held back by weak employment prospects and housing affordability strains. The latter will persist for as long as investment and employment remain under pressure.

To put the above comments into context, whereas consumption (private and public) contributed 4.7ppts to annual growth on average through 2016–2018, the past six months has instead seen year-to-date contributions of 3.8ppts.

Ahead, growth in China is set to slow below 6.0%yr. Additional stimulus is clearly necessary from both monetary and fiscal authorities.


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