As Communist Party leaders gathered to map out the direction of China’s economic policy in the next decade, data released over the weekend painted a picture of steady growth in the world’s second-largest economy. Better economic prospects may give leaders at the Third Plenum more leeway to push for difficult structural reforms, like removing implicit subsidies for state-owned enterprises or weaning local governments off their dependence on land sales – though pessimists worry that a strong economy could also sap the Party’s sense of urgency.
Industrial output grew 10.3% on-year in October, up from 10.2% a month earlier; retail sales held steady at 13.3% year-over-year growth; and inflation ticked up to 3.2%, above September’s level but within the government’s comfort zone. The only negative surprise was a slowdown in fixed-asset investment, which could herald slower growth ahead.
Economists share their views (slightly edited for style):
–The October activity indicators suggest the growth recovery since the third quarter continues… However, infrastructure and real estate investments, which have been the major drivers of economic growth, started to cool off in recent months… In addition, despite the rebound in the third quarter, structural problems in the Chinese economy showed no improvement, and some may have even gotten worse. In the near term, given that the downside risk of economic growth is much smaller, we expect that the new leaders will shift the policy focus back to structural reform. While those reforms will benefit long-term growth, some (e.g. dealing with overcapacity and financial imbalances) will drag on economic growth in the near term. – Haibin Zhu, Grace Ng and Lu Jiang, J.P. Morgan
–Economic activity held up slightly better than expected in October, but in contrast to September, the oomph came more from exports than domestic demand… The continued strength in economic activity means there is little need for further policy support, while the subdued inflation also means little danger of immediate monetary tightening. If export demand recovers more strongly in coming quarters, the government can afford to ease up on policy support, most notably infrastructure investment, in 2014. Indeed, should the momentum of October’s export rebound continue in the coming months, there could be an upside to fourth-quarter GDP growth compared with our current forecast of 7.6%. – Donna Kwok, Tao Wang et al., UBS
–History shows that economic growth usually slows after Third Plenum meetings. We think the government is likely to meet or exceed public expectations at the [plenum] session… We believe reforms are the only way to avoid systemic crisis, rebalance the economy, and unleash China’s growth potential, so as to prevent the country from falling into the so called “middle-income trap…” That said, history shows that structural reforms, while good in the longer term, tend to slow growth in the near term. – Jian Chang, Jerry Peng and Serena Zhou, Barclays
–The biggest surprise from China’s weekend data release was the strength of industrial production. However, fixed-asset investment growth – which statistically leads GDP growth – continued to trend lower. The growth momentum seems to be holding up fairly well in the fourth quarter, but likely less so beyond that…. Activity data painted a similar picture to the official manufacturing purchasing managers’ index report. Production was the only positive surprise, while more forward-looking indicators ceased to improve further, to say the least. – Wei Yao, Société Générale
–Overall growth momentum was maintained in October, allowing for a firmer macro stance. The exports recovery reported Friday surely helped… Overall investment momentum eased somewhat in recent months, with growth of manufacturing [fixed asset investment, or FAI] rising and real estate FAI growth declining, while growth of infrastructure FAI and consumption has been more stable. Also, with growth momentum sustained, the debates on economic policy during the Plenum of Nov. 9-12 can focus more squarely on reforms. – Louis Kuijs, RBS
–The government has managed to deliver stable economic data leading into the Communist Party Congress meeting… We believe monetary policy tightening has started, and that new bank loans and total social financing will decline in the fourth quarter from their high levels in the third, as GDP growth is on track to achieve the 7.5% target for 2013. We believe political pressures to deliver good macro numbers will lessen after the CPC meeting. Our low expectations on actual reform implementation for the CPC conference remain. – Zhiwei Zhang, Changchun Hua and Wendy Chen, Nomura
Compiled by Richard Silk
(Source: The Wall Street Journal)