6th November 2014

China Economic Focus Update

China Economic Focus Overview

– China’s economic slowdown continues. Growth in 2014 Q3 registered 7.3 percent (year-on- year), below 7.5 percent in Q2 and the lowest quarterly growth figure since 2009. On a sequential basis, growth slowed to 1.9 percent, down from 2.0 percent in Q2.

– It’s clear why growth is slowing. Fixed investment growth has decelerated from 21 percent in January 2013 to 16 percent in September 2014. Property investment, a subset, has slowed further, down to 12.5 percent in September 2014 from 23 percent growth in January 2013.

– Industrial production, which expanded in August at the slowest pace since the global financial crisis, recovered to 8 percent growth. Inflation dropped markedly in September to 1.6 percent, compared with 2.0 percent in August. The producer price index remains below zero.

– Latest data also reveal the continuation of a number of trends that point towards a steady, structural deceleration rather than anything more dramatic. Retail sales, incomes and the services sector all showed robust growth, which is positive for internal economic rebalancing.

– Crucially, the labour market, always the main focus of the authorities’ attention, remains robust, with official data showing this year’s target for urban job creation had already been met at the end of September. Growth in median income continued to outpace nominal GDP growth, meaning that the average household is enjoying an increasing share of dividends from growth.

– As a result, the authorities are unlikely to introduce large-scale stimulus measures soon. Premier Li Keqiang and other senior figures said that growth during the three quarters of 2014 remained ‘in a reasonable range’ and described the situation as a ‘new normal’.

– Monetary policy is likely to remain relatively tight, including as a result of a regulatory clamp- down on shadow-banking and other more exotic forms of financial intermediation. Credit continues to grow faster than headline GDP, meaning that China’s debt-to-GDP ratio continues to rise, but pace of expansion has been slowing steadily for the past 18 months.

– The Communist Party’s fourth plenum in October focused on rule of law. While this is less-clearly relevant to the economy than, say, last year’s 3rd Plenum, many economists see creating a transparent and predictable legal system as one of China’s greatest challenges to sustainable growth.

– Further examples of our recent reporting can be found here