China September quarter GDP grows 6.7%

Opens window for policymakers to deliver on vows to rein in excessive credit and surging property prices

China's economic growth remained stable in the third quarter, all but ensuring the government's full-year growth target and opening a window for policymakers to deliver on vows to rein in excessive credit and surging property prices.

Gross domestic product rose 6.7 per cent in the third quarter from a year earlier, matching the median projection by economists surveyed by Bloomberg, and smack in the middle of the government's 2016 goal of 6.5 per cent to 7 per cent growth. Services industries paced the expansion in the first nine months of the year, expanding 7.6 per cent. Stabilising growth gives room for policies aimed at containing swelling leverage and curbing excessive financial risks, with IMF researchers among those calling for such efforts. The government released guidelines last week for reducing debt, yet past pledges have often been ignored as rampant credit growth fuels surging house prices in the nation's biggest cities. "It's amazing what a housing bubble and crazy debt increases can achieve," said Michael Every, head of financial markets research at Rabobank in Hong Kong. "This is not sustainable - but then the alternative is nothing anyone wants to think about."

Releases for September showed the continuing shift in China's economy toward consumer spending, with retail sales gains outpacing the rise in industrial production. Investment spending continues to be led by the public sector, the figures showed, with subdued private business spending highlighting the problem of high levels of debt. September data showed Industrial output rose 6.1 per cent from a year earlier, against the median forecast for 6.4 percent.

Retail sales gained 10.7 per cent, matching the median forecast Fixed-asset investment increased 8.2 per cent for January through September, matching the forecast. State firms drove the gain, with a 21.1 per cent jump in investment, while private investment advanced 2.5 per cent

"Economic activity seems to be holding up reasonably well, with few signs that a renewed slowdown is just around the corner," said Julian Evans-Pritchard, an economist at Capital Economics in Singapore, "Nonetheless, the recent recovery is ultimately on borrowed time given that it has been driven in large part by faster credit growth and a property market boom, both of which policy makers are now working to rein in."

China's broadest measure of new credit exceeded estimates in September, data released Tuesday showed, underscoring escalating concerns over a property binge and the pace of debt expansion.

Property developers seem to have taken heart from surging prices in major cities, with completed investment in real estate development rising at a 5.8 per cent pace in the first nine months of the year. But they appear positively restrained when compared with the market for apartments: the value of China's new home sales rose 61 per cent in September from a year earlier, defying policy makers' moves to cool the boom.

At least 21 cities have introduced purchase restrictions and toughened mortgage lending since late September, reversing two years of easing to support home buyers. Goldman Sachs Group. has said more tightening is likely to follow if prices keep soaring, while Citigroup. estimates shrinking demand may lead sales volume to contract in the fourth quarter.

"Growth seems to be underpinned by real estate," said Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group. in Hong Kong. While manufacturing and exports confront challenges, "growth no longer concerns the PBOC this year," he said, referring to the People's Bank of China.

The economy maintained expansion of about 7.1 per cent in September, according to a Bloomberg Intelligence monthly growth gauge.

China's steel mills have meanwhile clicked into a higher gear, with production climbing from a year earlier as the property boom drives domestic demand.

Shares in Shanghai held modest gains after the data while the yuan was little changed.

Wednesday's reports also showed further evidence of diminishing disinflationary pressures in the world's No. 2 economy, with the GDP deflator - a broad measure of costs - rising 0.74 per cent for the first nine months of the year, the quickest pace since 2014. That comes on top of figures last week that showed the first gain in factory-gate prices in China since 2012.

Bloomberg

THE GROWING DEBT PROBLEM

• China is still adding credit at a heady pace, and experts are starting to sound alarm bells
• Under this situation, China risks its own version of the 2008 crisis that shook Wall Street and plunged the United States into recession and years of painfully slow growth
• The rest of the world - which is still dealing with Europe's woes - could follow
• Last month, the Bank for International Settlements published new data estimating that the gap between China's outstanding credit and its long-term economic growth rate had widened to a record and was well above the historical level
• Part of the problem lies in the rapid growth of what is known as shadow financing, which have been the focus of a number of prominent frauds
• The sharp rise in debt prompted one IMF official to warn this month of the risk of a financial "calamity" emanating from China.
• Andy Rothma, an investment stratagist and others point to China's tight grip on its own financial system. It controls the country's big banks as well as the big companies that borrow the most. It also limits how much money can leave its borders and keeps a firm grip on the value of its currency.
• China could make progress with a plan to restructure debt while increasing spending on areas that could benefit its growing consumer class, like medical care and social services.
• At the same time, recent efforts to support growth by increasing state spending have met with another challenge: The government is getting less bang for its buck.