China will be the talk of financial markets around the world come Wednesday.
A whole swathe of monthly economic indicators will be released, along with the granddaddy of them all, September quarter GDP.
24 hours to go before the data dump hits, it’s stuck me just how different investor sentiment is towards this GDP release, particularly compared to recent years.
Instead of talk about growth undershooting to the downside, or constant chatter about the figure being inflated to reflect government goals stipulated earlier in the year, sentiment on this occasion is far more optimistic, at least towards the near-term.
Thanks to a lift in government infrastructure investment, rolled out earlier this year, along with an acceleration in credit growth, the risks to GDP, seemingly, are not about growth undershooting to the downside, but upside.
Based on the median economist forecast offered to Bloomberg, GDP is expected to grow at 6.7% in the September quarter, the same pace as the previous two quarters.
And, if remarks from Chinese premier Li Keqiang are anything to go by, it could be even stronger, after he said earlier this month that China’s economic performance during the quarter was “better than expected”.
It’s been a stark turnaround in fortunes, as noted by the Commonwealth Bank’s China and Asia economist, We Li, in a preview note out today:
According to our GDP tracker, improvements in industrial production, financial markets and retail sales are key factors behind China’s economic recovery in Q3. Growth of industrial sectors (which accounts for 34% of China’s economy) is expected to average 6.2% yoy in Q3, up from 6.1% yoy in Q1 and Q2. The recovery in China’s export growth, rapid state-directed infrastructure investment and inflated housing demand have played a key role here. Retail sales growth (which tracks performance of retail, wholesale and catering industries, accounting for 12% of the economy) averaged 10% in July and August in real terms, compared with 9.8% in Q2 and 9.7% in Q1. Car sales growth accelerated to 26% yoy in August, up from 12% in Q2. Residential electricity consumption also looks robust. In part, the strong consumer markets are reflective of booming housing markets, which prompt demand for cars and home appliances, and also have a positive wealth effect.
Yes, it’s all looking peachy near-term. An economic fairy tale of enormous proportions.
However, as Li points out, much of the economic recovery has been due to state-based infrastructure investment, rapid credit growth and booming house prices in many of the nation’s largest east coast cities – all factors that one would not generally associate with sustainable long-term growth.
That could be the one factor that could tarnish tomorrow’s GDP report, presuming that it prints at-or-above expectations as it almost always does.
It’s been driven by debt, investment and property, the three pillars that propelled Chinese economic growth in the past.
If recent form is anything to go by, the People’s Bank of China is likely to release monetary growth figures for September alongside the GDP report with investors likely to take a closer look than usual given it’s been partially responsible for the recent stabilisation in economic activity.
New loan growth from banks is expected to come in at one trillion yuan, fitting with the above-average levels seen earlier this year. Though this reflects attempts from policymakers to limit lending from China’s shadow banking sector, it also underlines the point that rapid debt has underpinned the recovery.
Growth in total social financing – the broadest measure of liquidity, which captures lending from non-traditional sources within China’s financial system, will also be watched with interest.
A rapid acceleration in credit growth could potentially provide markets with their next source of China economic angst, simply swapping near-term concerns for fears over what policy decisions today could deliver in the future.
Only last week, the Reserve Bank of Australia summed up perfectly the conundrum facing Chinese policymaker as they attempt to juggle growth, debt and financial stability at present, warning that the “continued reliance on debt-financed growth and bank forbearance, along with official actions that reinforce perceptions of implicit government guarantees, add to existing vulnerabilities” within China’s financial system.
“Chinese authorities recognise these risks and have often expressed concern about the build-up in leverage. But implementing the wide sweep of financial reforms and other actions needed to address the growing vulnerabilities, within an increasingly large and complex financial system, will remain a key policy challenge,” the bank said.
It’s these risks, and the challenge facing policymakers as they balance near-term growth against longer-term structural goals, that could well be the focus of markets tomorrow, regardless how the GDP figure prints.