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China’s economic growth remains stable in Q3

China’s economy expanded at a pace of 6.7% in the third quarter of 2016. GDP was steady for a third consecutive quarter, but economists expect authorities to rein in excessive credit that has exposed the risk of a property bubble.

GDP growth in China for the third quarter of 2016 grew 18.9 trillion Rmb or approximately $2.8 trillion. The world’s second-largest economy registered a growth rate of 6.7% on a year over year basis in real terms matching economist expectations. Growth was, however, short of the 7% targeted growth rate set by the Chinese government and has remained anchored to 6.7% for nearly three consecutive quarters this year. On a quarter over quarter basis, GDP grew at a pace of 1.8% in Q3, 2016.

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China (Annual) GDP Growth Rate: 6.7% (Q3, 2016). Source: Bloomberg.com

China’s transition to a consumer-based economy continues

The official data released earlier this week showed a modest improvement in fixed asset investment which has been a major contributor to growth during the quarter ending September. Investment poured into manufacturing and property sectors rebounding from the recent slump and helped by the strong housing market.

China, which in recent years has been looking to shift towards a consumer-oriented economy also showed positive signs. Retail sales growth continued to pick up in September, rising at a pace of 10.7% on a year over year basis during September with most of the gains coming from auto sales which rose 26% on the year, compared to 24% growth registered in August.

The shift to a consumption-oriented growth came with the price of declining net exports which could pose a drag on economic growth. Exports from China have been suffering from sluggish global demand and loss of competitiveness on rising labour costs and exchange rate.

The services sector has been driving growth with the GDP report showing that the tertiary sector or services sector accounted for nearly 52% of the GDP in the recorded quarter. It was higher than the 40% contribution from the manufacturing sector (primary sector, which is agriculture was seen contributing 8.4%). The transition is likely to continue over the coming quarters but could put a check on the pace of growth.

Credit growth and property boom pose risks

Researchers at IMF had previously called for China’s policies to check the rising credit market against excessive risks. While China had issued new guidelines for reducing debt, history has shown that it has done little to put a lid on the rampant credit growth which has also been fuelling house prices in some of the country’s biggest cities. Last week, latest credit data showed that new credit exceeded analyst estimates in September underlining heightened concerns on a property market binge and the resulting expansion of debt. New home sales rose 61% in September from a year ago, putting policy makers in a spot to cool the property markets.

What does China’s GDP growth mean?

Many analysts expect GDP growth to fall short of the government’s 7% target, but remain hopeful that the fourth quarter GDP will average around the 6.7% – 6.8% range. Many agree that credit has been fuelling demand, but with the risks of a property bubble in the world’s second-largest economy, authorities could be seen coming out with new measures to tackle credit risks and rein in the property prices. The question is whether these policies will also affect growth as a result.

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