China: GDP growth slows slightly in Q3 but not enough for more stimulus

China’s GDP growth slowed slightly less than expected in Q3 to 7.3% y/y (consensus: 7.2%, DBM: 7.2%) from 7.5% y/y in Q2. Seasonally adjusted, GDP growth eased to 1.9% q/q (consensus: 1.8%, DBM: 1.9%) from 2.0% q/q in Q2. For the first three quarters of 2014 as a whole, GDP growth has so far increased 7.4% y/y – only slightly below the government’s 7.5% target for GDP growth for the full year.

Growth in industrial production in September rebounded more than expected to 8.0% y/y (consensus: 7.5% y/y, DBM: 8.2% y/y) from 6.9% y/y in August. According to our calculations, seasonally adjusted growth in industrial production rebounded 1.2% m/m in September after contracting 0.1% m/m in August. In our view, the industrial production data in August and September has possibly been distorted by an impact from the number of working days. Compared with last year there was one less working day in August and one extra working day in September. On average industrial production in August and September only increased 0.6% m/m or 7.5% y/y, so the overall picture remains relatively weak.

Growth in fixed asset investment (FAI) in September slowed more than expected to 16.1% ytd y/y (consensus: 16.3%, DBM: 16.2%) from 16.5% ytd y/y in August. We estimate growth in FAI eased to 11.5% y/y in September from 13.3% y/y in August. The slowdown has been substantial in recent months (see chart on page 2).

The property market continues to be weak with growth in sales of new homes measured in square metres contracting 12.1% y/y in September after contracting 13.4% y/y August. Housing starts also measured in square metres contracted 6.2% y/y in September. That said, there are tentative signs of stabilisation in the property market. Seasonally adjusted new home sales (again measured in square metres) increased 1.9% m/m in September after increasing 2.5% m/m in August. Sales of new homes is the best leading indicator for the overall property market.

Growth in retail sales in September eased to 11.6% y/y (consensus: 11.7%, DBM: 11.6%) from 11.9% y/y in August. The slower growth seems to have be driven mainly by the sharp decline in inflation in September. In real terms, growth in retail sales accelerated marginally and the overall picture remains that real growth in retail sales seems to be relatively stable. Hence, there are so far no signs of a substantially negative spill-over to private consumption from the weak property market.

The overall picture for the Chinese economy remains that growth is slowing mainly driven by weaker investment demand in the wake of slower credit growth. So far the slowdown does not appear to be severe because private consumption appears to be relatively resilient and export growth has improved. We expect growth to continue to slow moderately in Q4 to 1.8% q/q from 1.9% q/q in Q3, but due to a favourable base impact the year-on-year growth in GDP will probably remain unchanged at 7.3% y/y in Q4. We maintain our GDP forecast for 2014 at 7.4% and for 2015 at 7.2%.

There continues to be mainly downside risk on our GDP forecast. First, the property market remains a concern albeit the negative impact from the property market should be less in the coming quarters. Second, there is an increasing risk that a weaker global economy could start to weigh on China’s export growth.