China: Temporary growth rebound

As expected, GDP growth accelerated in Q3, hitting 7.8 per cent year-on-year following growth of 7.5 per cent in Q2. (Chart 1) The rebound has been driven by stateled infrastructure spending. However, policymakers are unlikely to welcome another investment-driven surge; the rebound is expected to falter in coming quarters along with the slowdown in credit growth. We predict that GDP will grow by 7.7 per cent in 2013 and 7.4 per cent in 2014. In 2015, growth will decelerate to 7.0 per cent. Both the official purchasing managers index (PMI) and the Markit/HSBC index recovered in August but levelled out in September, raising questions about the durability of the economic rebound. (Chart 2) Exports were weaker than expected in September, falling 0.3 per cent year-on-year. Some of the weakness can be explained by an unfavourable base effect but other emerging economies also showed a similar trend. Imports rose by more than 7 per cent year-on-year. (Chart 3) Relatively strong commodity imports support the view that the economic rebound is driven by investment and infrastructure construction. Government infrastructure investments (mini stimulus) explain much of the recent economic rebound, while manufacturing investment is trending downward. (Chart 4) Industrial production and retail sales have stabilised recently. (Chart 5) Headline inflation accelerated to 3.1 per cent in September, mainly driven by a rise in food inflation that hit 6.1 per cent. Headline inflation is not expected to rise much further; food prices are stabilising and there are no signs of price pressure elsewhere. Core inflation is still below 2 per cent. (Chart 6) The interbank liquidity situation has improved significantly after the liquidity squeeze engineered by the central bank in early June. However, short-term rates are still above the pre-squeeze level. (Chart 7) New bank lending was CNY787 billion in September, an increase compared to the previous month. However, the broader total social financing measure slowed, both compared to previous month and in year-on-year terms. (Chart 8) Unlike other Emerging Market currencies, the yuan (CNY) has not been affected by Fed tapering worries. (Chart 9) A large increase in foreign exchange reserves in the third quarter indicates that China was a recipient of net capital inflows in Q3.
Key data Percentage change

FRIDAY OCTOBER 18, 2013 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2012 2013 2014 2015 GDP* Inflation* USD/CNY** 7.7 2.6 6.23 7.7 2.8 6.08 7.4 3.2 5.90 7.0 3.4 5.85

* Percentage change. ** End of period exchange rate. Source: Macrobond, National Bureau of Statistics of China, SEB.

Economic Insights

CHARTS ON THE CHINESE ECONOMY