China: In-line 3Q17 GDP growth at 6.8%YoY - ING

China’s strong economic fundamentals, supported by financial deleveraging will continue to pressure the interbank interest rate higher and USD/CNY lower, according to Iris Pang, Economist at ING.

Key Quotes

“GDP growth slowed in line with consensus to 6.8% YoY in 3Q17 from 6.9% in the previous quarter. We are still optimistic on China growth benefitting from ongoing structural reforms, especially the overcapacity reduction exercise.”

“New growth areas including innovative technology platforms, new energy cars, and the manufacturing of robots have brought industrial production growth to 6.6% YoY in September, an acceleration from 6.0% YoY in August. A 69.4% YoY surge in production of industrial robots and a 30.8% surge in new energy cars were the most encouraging standouts, representing China’s move up the value chain in world production.”

“Fixed asset investment growth slowed more than expected to 7.5% YoY YTD in September from 7.8% in August (consensus: 7.7%) but steady strong infrastructure investment growth of 19.8% YTD was a silver lining. However, deleveraging reform in overcapacity sectors, including mining, has dragged the overall investment growth slower. Real estate development grew slightly faster at 9.0% YoY YTD due to increasing activities in lower tier cities at the centre of the nation, which were up 13.3% YoY YTD. However, as tightening measures have been in place for more cities, we believe the real estate development trend will slow in coming months. By ownership of investment projects, local government investment has grown by 8% YoY YTD, while central government projects have fallen 6.0% YoY YTD. This reaffirms PBoC’s Zhou’s worry of rising local government debts.”

“Middle class has continued to support retail sales, which grew 10.3% YoY in September (consensus: 10.2%, prior: 10.1%), especially on strong furniture and decoration spending as a result of still strong housing market. Data do not include the summer holiday spending abroad but a 29% YoY YTD surge in online shopping shows changing consumer behaviour.”

“We remain optimistic that the Chinese economy is moving towards to a consumption driven economy. With twin growth engines – consumption and investment – firmly in place we believe the path of future economic development is to move to spending on services facilitated by high-tech products. Data show that real activities are indeed moving to high growth areas. Overall, the Chinese are not only producing high-tech products but also are consuming the products, possibly at more than the average high-tech consumption in the world.”

“The continued financial deleveraging reform together with slower residential property development we expect will likely weigh on investment growth going forward. We are confident of strong consumption demand supporting GDP growth at 3Q’s 6.8% pace in the final quarter of the year.”

“The financial deleveraging will continue to pressure interbank interest rates higher. The recent announcement by the PBoC to relax reserve requirements for banks’ inclusive finance business should not be interpreted as a more relaxed liquidity environment. This kind of targeted monetary policy is unlikely to benefit zombie companies that face overcapacity problems.”

“At 6.8% 3Q GDP growth was short of the 7% pace for the second half of the year flagged by PBOC Governor Zhou recently. We do not see this eroding investor confidence in the CNY, which we believe remains on an appreciation path. The future growth picture in China is very positive as long as deleveraging reform is ongoing. Once the reform is completed, the economy will be driven mostly by high-growth, high-tech sectors. The economic fundamentals for the CNY remain strong. We reiterate our 6.50 USD/CNY forecast for the end of 2017 and our forecast of further 4% appreciation in 2018.”