Chinese Economy Likely To Continue Recovery Mode In Q4

The author is head of Greater China research at Standard Chartered, Stephen Green

China is in recovery mode, and we expect this to continue in the fourth quarter. GDP growth improved to 7.8% in the third quarter from 7.5% in the second quarter. On a quarter-on-quarter seasonally adjusted basis, growth accelerated to 2.2% in the third quarter from 1.9% in the second quarter.

The economic turnaround since the second quarter appears to have brought back moderate inflation. The official GDP deflator picked up to 2.4% year-on-year in the third quarter from 0.5% in the second quarter. Improving demand bodes well for industrial capacity utilization and profit growth in the fourth quarter.

The market has had concerns about CPI inflation breaching the 3% level in September (3.1% year-on-year); the recent acceleration has been driven by food. However, major food prices – including pork, eggs, fresh vegetables and fruits – have been falling since the start of October.

Meanwhile, prices of manufactured consumer goods have been basically flat. We therefore expect CPI inflation to stay below 3.5%, the official 2013 target, in the fourth quarter.

The labor market remains robust. The aggregate labor demand-to-supply ratio reported by 100 or so job centers edged up to 1.08 in the third quarter from 1.07 in the second quarter; a reading above 1 is positive.

Moreover, urban households’ disposable income rose by 7.2% in real terms in the third quarter, after growth slowed to 6.4% in the second quarter. This has supported a mild pick-up in urban household consumption, which grew 5.6% in the third quarter, up from 4.6% in the second quarter. Real growth in rural households’ cash income also accelerated, to 10.2% in the third quarter from 8.9% prior. Migrant workers’ real wage growth stayed robust at 9.9%.

Industrial production (IP) growth improved in the third, to an average of 10.1% from 9.1% in the previous quarter. Electricity production rose 9.9%, up significantly from 5.4%. By region, western China continued to lead industrial growth, followed by the central and eastern regions; their respective average year-on-year IP growth rates were 11%, 10.5% and 8.9% as of the third quarter.

Real growth in fixed asset investment (FAI) recovered to 20.3% in the third quarter after slowing to 19.9% in the second quarter. Beijing has been supporting selected infrastructure (rail, metro and water treatment) and social housing projects since the summer.

Growth in investment spending on central government-approved projects accelerated to 11.5% from 8%. Growth in FAI authorized by local governments has also stabilized at about 20.8% in recent months, after slowing in the second quarter. FAI growth is likely to maintain its positive momentum in the fourth quarter.

We expect the monetary policy stance to be unchanged in the fourth quarter. A recent statement from the People’s Bank of China (PBoC) suggests the following:

There is generally no reason to worry about illiquidity in the system, especially given the resumption of net capital inflows since the third quarter. Interbank rates are likely to stay stable in the fourth quarter.

Monetary policy has been effective so far, with differentiated treatment across sectors – credit support to SMEs, agriculture and inland China development, and restrictions on industries with overcapacity. Money supply and loan growth rates were appropriate as of September.

here has been no change in policy on lending to the real-estate sector. Fast growth in housing loans, at 19% in September, was primarily driven by first-home buyers and social housing construction.

The authorities will take a pragmatic approach to savings rate liberalization, according to market conditions. The introduction of certificates of deposit (CDs) in the interbank market is scheduled to happen soon.

(The article has been edited for clarity)

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