Chinese real gross domestic product (GDP) rose by 6.8% (year-on-year) in the third quarter, in line with consensus expectations. On a quarter-over-quarter basis, growth slowed a touch to a 1.7% pace in the third quarter, also in line with consensus. Growth in 17Q1 was revised up to 1.4% q/q from 1.3%, while growth in 17Q2 was revised up to 1.8% q/q from 1.7%. Altogether, the data released overnight puts China’s economy on pace to expand at a 6.8% pace in 2017.
Nominal GDP grew 11.2% (y/y) in the third quarter, on par with the 11.1% pace recorded in the second quarter. Producer prices rose an average of 6.3% y/y, extending the streak of strong producer price gains that began at the start of this year. Consumer prices rose an average of 1.6% y/y in the quarter, the strongest pace of advance seen this year.
Economic activity on an industry basis was broad-based, with all major sectors expanding on a year-on-year basis. Secondary industry performance slowed a touch in the third quarter, likely a reflection of slower construction activity. Growth in tertiary (services) industries ticked up a bit from the previous quarter and recorded the strongest gain yet this year at 8.0% y/y. Service industries comprise the largest share of economic activity in China at just over half.
Fixed asset investment (excluding rural areas) slowed to a sub-8.0% trend pace in the third quarter after advancing at almost a 9.0% trend pace in the second quarter (reported on a year-over-year, year-to-date basis). It should be noted that fixed asset investment has been slowing consistently since early-2013 when it was rising by around 20% per year, reflecting the shift toward services.
Industrial production rose 6.6% (y/y) in September, a touch firmer than the consensus call for a 6.5% gain. However, industrial production in the third quarter as a whole slowed to its slowest pace of advance year-to-date at 6.3% y/y, suggesting slower economic activity in the fourth quarter.
Key Implications
Once again Chinese economic activity did not disappoint market expectations. But, monthly indicator data suggests that growth is likely to slow a bit further in the fourth quarter, reminiscent of the trend of strong mid-year growth giving way to weaker activity at year-end and at the start of the next year observed since 2015.
Concerns remain about the rapid pace of credit growth in China, particularly in the years following the Great Recession. Total social financing credit growth ticked up a touch in the third quarter, but remained well below the strong pace recorded in the first quarter. Slower credit growth is consistent with weaker trend growth of fixed asset investment. Chinese authorities have made some gains in reining in excess credit growth, but remain sensitive to historically high and rising levels of debt across all sectors (consisting of corporate, household, and government) in light of the risks that this poses to its domestic banking sector, particularly in an environment of slowing economic growth. As such, we anticipate policymakers will continue to maintain a tightening bias in domestic credit conditions at least for the remainder of this year.
The 19th National Congress of the Communist Party of China kicked off yesterday, and is expected to last until October 24th. Over the next few days we anticipate Chinese officials to outline an updated five-year economic plan for China, as well as announce new political appointments. Some of the most notable announcements thus far include ambitions for China to become a globally influential leader by 2050, and plans to continue to pursue market-oriented reforms that help to assure foreigners that China will open up to more foreign investment. We plan on releasing a summary of the major announcements after the conclusion of the congress.
