NOMURA: The Chinese Recovery Is Over

China worker stone jackhammerREUTERS/David GreyA stone craftsman drills a large rock before it is sculpted into a statue in what is called the ‘sculpture zone’ in the town of Dangcheng in Hebei Province, located around 150 km south of Beijing, January 16, 2008.

Last night, China posted solid growth of 7.8% for Q3.

One of the themes this year has been China outperformance. While many emerging markets have slowed precipitously, China has held on pretty well, which is ironic given all the hype about a “hard landing”

But according to Nomura economist Zhiwei Zhang, this is it. This quarter marks the top, and now we’re about to see deceleration. In part, it’s because this quarter and recent ones have been driven by unsustainable investment spending that can’t continue, while leading indicators and other measures we’ve seen for September are already showing a slowdown.

Leading indicators of activity suggest China‟s recovery ended in September. Both investment growth of on-going projects and new projects slowed by 0.3pp and 1.1pp from August, to 18.6% y-o-y ytd and 13.3% y-o-y ytd, respectively, which does not bode well for investment growth down the road. In the property sector, growth of floor space sold slowed further to 23.3% y-o-y ytd in September from 23.4%, while growth of floor space started picked up to 7.3% y-o-y ytd from 4.0%.

The rate of decline of land area purchased eased in September, to -3.3% y-o-y ytd from -9.1% in August. Collectively, this suggests an increase in housing inventory which is likely to pressure the property sector in future. We maintain our view that the recovery ended in Q3 and that GDP growth will slow to 7.5% y-o-y in Q4 and 6.9% in 2014. We see downside risks to our Q4 GDP forecast. We have argued that China‟s recovery is fundamentally unhealthy , as it has been mainly driven by heavy industry and stands in contrast to the principles recently espounded by both President Xi Jinping and Premier Li Keqiang — that a lower rate of GDP growth can be tolerated to ensure a better quality of growth in the future. We expect the government to cut its growth target for 2014 to 7% in December in an effort to contain financial risks such as local government debt risk.

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