How Sustainable Is China's Growth

• China's economy expanded 8.9% y/y in Q3 2009, bringing the year-to-date growth rate up to 7.7% y/y. Industrial production (value added) expanded 12.4% y/y in Q3, up from 9.1% in Q2. Investment continues to drive growth with fixed asset investment grew by 33.4% through Q3, 6.4 percentage points above the rate posted the year previous. Consumption has held up, with retail sales climbing 15.1% through Q3 in nominal terms, or 17% in real terms. CPI fell 1.1% through Q3 but has climbed on a monthly basis. Exports and imports are likewise climbing on a m/m basis. (National Bureau of Statistics, 10/21/09)

The Outlook for Q4 and Beyond


• The pace of growth slowed in Q3 to about 9.5% on an annualized q/q basis in Q3 from an estimated 16% pace in Q2. Industrial production growth picked up to 13.8% in September from 12.8% in August and 10.8% in July. Retail sales accelerated slightly to 15.5% y/y, roughly similar to August's 15.4% growth and consumer prices have continued to climb on a m/m basis falling only 0.8% y/y in September (from -1.2% in August).
• Premier Wen Jiabao: "China’s economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren’t appropriate.” (via FT, September 2009)
• Minggao Shen and Ken Peng of Citi note that "domestic demand is still the main driver of current economic momentum in China. Retail sales are again accelerating after holding steady in the spring.The 15.4% y/y growth received large support from the housing boom, as construction materials sales grew 36.6%y/y, up from 25.8% in July" while other goods were merely stable. However, a pickup in exports (they fell on an absolute and seasonally adjusted basis from July) is needed for further growth momentum as other stimulus may have already peaked (09/ 11/09)
• Economist Lu Ting, Bank of America-Merrill Lynch: Growth could reach 9% in Q3 and 10% in Q4. (via Bloomberg)
• Flemming Nielsen of Danske Bank forecasts that "sequential growth in industrial production in China is slowing, despite the year-on-year growth in industrial production in August to around 13.0% y/y from 10.8% y/y in th previous month. This development will be consistent with GDP growth easing to around12% q/q in Q3 from more than 16% q/q in Q2. " (09/07/09)

Q2's reacceleration


• Chinese growth accelerated to 7.9% y/y in Q2 2009, from 6.1% in Q1 (the slowest in more than a decade) as Chinese investment and bank lending continued to accelerate, and retail sales held up. Government spending and bank lending have contributed to faster growth despite weak exports. Q2's growth which analysts suggest was 12=16% on a q/q basis came was the first acceleration after seven quarters of deceleration. Investment (35.3%) and industrial production (10.7%) saw further increases on a y/y basis in June 2009, while construction rose for the first time in a year.
• Economist Ken Peng, Citi: The annualized q/q pace of growth was around 11.8% from Q2, but the weakness in consumer prices indicates China is not out of the woods.
• National Bureau of Statistics: Of the 7.1% real GDP growth in H1 2009, 6.2 percentage points (ppts) came from investment, spending contributed 3.8ppts and net exports took away 2.9ppts. (via Citi)

How Sustainable Is China's Recovery?

• IMF: Expansionary fiscal/monetary policies, a rebound in capital markets/inflows, and the growth impulse from restocking helped China's economy to recover. The IMF forecasts 8.5% real GDP growth in 2009 and 9% growth in 2010. "With the recovery gaining strength, the policy challenge is to determine when and how to withdraw policy support while ensuring a successful transition to more balanced medium-term growth."
  (October 1, 2009)
  
• World Bank: Very expansionary fiscal and monetary policies kept the economy growing respectably with a 7.2% growth rate is expected for 2009. China may not grow in the high double digits until the global economy recovers. Market-based investment will lag, and consumption will slow, meaning that the boost to growth may not carry through to 2010. (June 2009)
• OECD: Because of China's policy responses, Chinese GDP growth is forecast to be 7.7% in 2009 and 9.3% in 2010, an upward revision from March forecasts of 6.3% in 2009 and 8.5% in 2010. (June 2009)
• Morgan Stanley: "On a seasonally adjusted basis, the economy experienced a 5% rebound in Q1 2009, after the first q/q contraction (-0.5%) in almost eight years. Aggressive policy stimulus should bring further recovery in H2 2009, making China among the first to emerge from the global downturn. The recovery should be relatively 'job-rich' but 'profit-deficient,' especially in H1 2009, with those exposed to government-supported capex programs likely benefiting most."
• Bank of Finland: "The massive increase in lending associated with the stimulus package could lead to imbalances in the Chinese economy, which might make economic policy more difficult and constrain growth. The current stimulus measures have only reinforced the investment- and export-orientation of the economy, while domestic demand continues to play a minor role." (September 2009)
  
• ADB suggests China is not rebalancing away from investment-led growth, but is shifting investment sectors. China runs the risk of entrenched inflation and overheating in some sectors.
• In Q1, government stimulus boosted investment and consumption held up, despite a fall in real incomes. Final consumption, investment and net exports contributed 4.3, 2.0 and -0.2 percentage points to GDP, respectively.

p/s photos: Kim Ahep