China Growth Suggests Economy on the Mend

Bicycle assembly at the Giant Manufacturing Co. Ltd. factory in the Kunshan area of Suzhou, Jiangsu Province, China. Photograph by Nelson Ching/Bloomberg

Has China’s economy bottomed out?

Economists and analysts are posing that question following the Oct. 18 announcement that gross domestic product grew 7.4 percent in the third quarter, from a year earlier, down from 7.6 percent growth in the previous three months. China’s economic growth has started to stabilize, Premier Wen Jiabao said in a recent meeting with heads of Chinese companies, industrial leaders, and local government officials, the Xinhua News Agency reported on Oct. 17. The economy will continue to show “positive changes,” Wen said. He has set a target of 7.5 percent growth for the year.

With continued weakness in Europe and North America, “what we see is a good performance. It augurs well for continued soft landing,” John Quelch, professor of international management and dean of China Europe International Business School in Shanghai, said in a telephone interview after China’s statistics bureau released the latest growth figure.

Oct. 18 (Bloomberg) -- Michael McKee reports on the Chinese economy. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Contributing to the optimistic sentiment: a slew of positive indicators throughout the economy, suggesting a corner may have been turned, following seven quarters of slowing growth. Industrial production, for example, grew 9.4 percent; fixed asset investment in cities grew 20.5 percent; and retails sales were up 14.2 percent—all ahead of estimates. Exports and money supply also grew faster than expected. “In our view the September data suggest that a bottoming out may be in sight,” Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong, wrote in an Oct. 18 note.

Add Ting Lu and Larry Hu, China economists at Bank of America Merrill Lynch in Hong Kong, in an Oct. 18 note: “We are seeing an increasing amount of evidences for green shoots. This evidence comes from a wide range of sectors including transportation, commodity, exports, property market, credit and money data, tourism in Golden Week [China’s week-long October holiday] and restocking by manufacturing companies.”

The good news has lessened pressure on Beijing to take further loosening measures, even as it prepares for a once-in-a-decade leadership transition, beginning at a Party Congress opening on Nov. 8. China’s central bank has left interest rates alone since July, following two cuts to the benchmark rate in one month. That followed three cuts in bank reserve ratio requirements, starting last November.

“As we saw in 2008 in the U.S., one never wants an economic crisis to accompany a leadership transition,” says Quelch, who predicts China is unlikely to take further accommodative steps before the end of the year. “The Chinese economy has been well managed; there won’t be any urgent or significant challenges that new leadership will have to face within the first 90 days.”

But even as these latest numbers have raised hopes, there are still worrying signs in the Chinese economy, particularly in such industries as steel, cement, and autos, now facing overcapacity following several years of hyper-charged investment growth. “Investment outside of real estate and infrastructure—mainstream corporate investment—appears to be losing speed, weighed down by spare capacity and weak profits,” says RBS’s Kuijs.

Still, Kuijs is predicting that China will grow 7.5 percent this year, meeting the official target, and tick up to 7.8 percent in 2013. “This assumes subdued growth globally but no major turmoil and, in China, a continued pro-growth macro stance but no major, game-changing stimulus,” says Kuijs. “The biggest risk to our outlook is still a larger global downturn combined with financial turmoil.”

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