China: Robust data support power change
Susan Joho, Economist, Julius Baer
This morning’s activity data for China confirmed that the economy held up in Q3, thanks to strong external demand for its exports as well as solid private consumption. Gross domestic product (GDP) growth in Q3 maintained its rather high pace, with the yearly growth rate only edging down to 6.8 per cent. Next to that, the activity data for September showed that retail sales remained strong, while industrial production rebounded and fixed asset investment continued to weaken. The latter two are negatively affected by the government’s drive for supply restrictions in certain industrial sectors, while at the same time industrial production got a boost from strong external and private demand.
Going forward, as we expect external demand to soften and production cuts to become more widespread over the winter, we could see a mild moderation in economic growth setting in towards year-end. However, the government will stand ready, for example with liquidity, to support the economy and engineer a gradual cooling. The importance to focus on the quality of economic development in the future rather than the quantity has also been highlighted yesterday in President Xi Jinping’s opening speech to the Party Congress, where he laid out his vision for the next 33 years. The content suggests that economic growth will be brought down gradually but surely, as ‘new economies’ in high-tech sectors will be fostered while ‘old economies’ will be scaled down. Environmental protection and debt control also remain top priorities for the coming years.
Xi Jinping’s opening speech confirms once more that he was able to consolidate power, having placed his thoughts at a position next to Mao Zedong’s and Deng Xiaoping’s. This will mean a continuation of started reforms, most importantly the supply-side restrictions, environmental protection and the internationalisation of the renminbi. Economic growth, which has held up nicely so far, will thus likely be guided lower at a gradual pace, with the quality and not the quantity of growth becoming relevant in Chinese leaders’ key targets.