The author is ANZ Greater China chief economist Li-Gang Liu
China’s third quarter GDP growth picked up to 7.8% year-on-year, in line with market expectations, up from the second quarter’s 7.5%, thanks to the "mini stimulus" package launched in early July.
While exports slowed significantly in September, which has dragged on growth somewhat, the domestic demand remains robust, supported by investment growth, led by property investment. Durable goods consumption also remained robust.
As the economy warmed up in the third quarter, we believe that China will deliver the growth target of 7.5% this year, and maintain our forecast that the Chinese economy will grow 7.6% for the whole year, with risk biased to the upside.
However, China’s economic recovery since late second quarter is not on a solid footing as there are few signs of restocking activity, reflecting a cautious mood before the Third Plenum of the Communist Party of China.
As inflationary pressure has picked up, the central bank is unlikely to change the tightening bias in the monetary policy for the remainder of the year.
The RMB is still under pressure to appreciate in the short term due to strong capital inflows amid delayed quantitative easing tapering. However, an overly-strong RMB is inconsistent with macroeconomic fundamentals.
We believe China’s local government debt problem is still manageable even though the debt audit could show a surge in local government indebtedness.
Further privatizing local state-owned enterprises and city commercial banks will help lower the debt level. Allowing local governments to issue debt may lower the liquidity risk as well.