Hoping We’ve Touched Bottom
GDP was up 6.7% y/y in Q3, maintaining the growth rate of Q1 and Q2. Rapid auto industry expansion and the steady real estate boom were the two main factors driving growth. Fixed asset investment excluding agriculture was up 7% y/y, down 1.2 pps from Q2. Industrial output was up 6.1% y/y, likewise flat on Q2. But demand for electricity spiked by 9.6% y/y in Q3, up 5.8 pps from Q2. Given the key predictor role of electricity usage, growth could pick up, and we see the 6.5% - 7% per year target as at least achievable.
Retail sales of consumer goods were up 10.5% y/y, flat on Q1 and Q2. Imports fell -4.7% y/y, up 2.1 pps from Q2, and up 8.8 pps from Q1, speaking to the possibility of future growth. Fiscal revenue and spending increased 5.9% and 12.5% in the year to September, down 1.3 pps and 2.7 pps respectively from H1. CPI was up 1.9% y/y in September, a 0.6 pps rise from August. The ex-factory price index of industrial products rose 0.1% y/y, ending its 5-year negative growth trend. We expect appreciation to increase. M1 was up 24.7% y/y at the end of September, down 0.6 pps from August, and stabilizing at a high level. M2 rose 11.5% y/y, flat on August.
The IMF in June raised its 2016 growth outlook for China to 6.6%, up 0.1 pp from its April projection, even though Brexit had prompted the Fund to slice its 2016 global growth forecast by 0.1 pp, to 3.1%. The growth upgrade for China shows that the IMF is optimistic about the major reforms underway here. The Fund’s outlook is consistent with our forecast, as China still has plenty of room to lift its fixed asset investment and current structural reforms, including by deleveraging and cutting excess capacity.
Major industrial firm profits rose 6.9% y/y in the first seven months of 2016, accelerating from H1’s 6.2% rise. Private firms’ profit growth was especially strong. We view this surprising profit increase, and other positive signals, as a consequence of cutting capacity and deleveraging. Those actions leave more room for the growth of private firms, since zombie firms (most of which are stated-owned) had been taking up more resources, including bank loans. We expect this supply-side reform to continue, and to generate more sustainable growth for China.
China’s export structure has change dramatically during this decade. Exports to the developed world rose, and imports from big commodity exporters fell. One notable feature is the steady increase of high-tech products. By cutting overcapacity, excessive steel products are finding buyers overseas. Developed countries are still China’s major trade partners, and South Korea has surpassed Japan as China’s biggest import source. The United States and European Union have also increased their shares of exports to China. In imports, consumption goods have risen markedly.
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