British Embassy Beijing

October 2013

Summary

2013 Q3 data were largely positive, showing a slight acceleration in activity compared with earlier in the year. Stable monthly data for September suggest the mild rebound is unlikely to be sustained into Q4 but the authorities’ overall targets for 2013 are now very likely to be met. This provides a favourable backdrop to important meetings in the autumn, where greater clarity is expected about the future direction of reform.

Detail

China’s economy grew by 7.8 percent (year-on-year) in the third quarter of 2013, up from 7.5 percent in the previous quarter. This was in line with forecasts, which have been steadily revised up since August, following a summer of quite bearish commentary. The economy has grown by 7.7 percent over the first 3 quarters of 2013.

Encouragingly, the labour market, an important indicator of stability, appears to be strengthening, with stronger urban and rural income growth and a rising ratio of job applicants to vacancies. Moreover, growth in all sectors of the economy accelerated but the services sector continues to outpace manufacturing (and agriculture). Finally, while overall retail sales were broadly stable, auto sales rose 13.2% year-on-year, up from 7.0% last month and the highest growth rate since September 2011.

Less encouragingly, the latest data illustrate how investment has resumed its role as the predominant driver of Chinese growth, contributing 4.3 percentage points to overall growth so far, relative to 3.5 percentage points from consumption (by contrast, last year consumption was the main contributor to growth). And exports unexpectedly fell last month, illustrating on-going weakness in external demand. 

Inflation last month increased to 3.2 percent, driven largely by rising vegetable prices. Inflation is now at its highest level since February 2013, though importantly it remains below the 3.5 percent target. Last month bank loans increased faster than forecasted but Total Social Financing, a broader measure of credit, decreased slightly from the previous month and contracted by around 14 percent compared with September 2012. Other important data points, including industrial production and fixed investment, were stable or fell slightly.

Chinese internal policymaking has been quiet this month, ahead of the November 3rd Plenum and subsequent Central Economic Work Conference. UK-Chinese economic relations received a major boost during the Chancellor of the Exchequer’s visit to China between 13-18 October, with new announcements made about civil nuclear collaboration, the Shanghai Free Trade Zone, inward investment, science and innovation and London as an RMB centre (see here for further information).

Comment

The better data most likely result from strong credit growth at the end of last year/start of this year and the impact of small stimulatory measures introduced this summer. Earlier in the summer, and in response to slightly softening data, the authorities had reiterated their commitment to ensuring that growth, inflation and employment all stayed within ‘reasonable ranges’.

A few of the important monthly data points (for example industrial production or fixed asset investment) were either stable or fell slightly in September, suggesting the economy is unlikely to continue to accelerate into 2013 Q4. As a result, the most likely outcome for 2013 overall is growth of around 7.5 percent, or slightly higher, thereby reaching the authorities’ 7.5 percent growth target for the year.

The data therefore provide a favourable backdrop to the Communist Party’s Third Plenum, held in November, and the Central Economic Work Conference, likely to be held in December. The first event is political and has a longer horizon. The second is more technocratic.

Disclaimer

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