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China: GDP growth decelerated in Q3 but is close to hitting the low point

GDP grew by 7.4% year-on-year in the third quarter compared to 7.6% in Q2. (Chart 1) Growth slowed for the seventh consecutive quarter. We have cut our GDP forecast slightly to 7.7% in 2012. In 2013, GDP will increase by 8.0% and in 2014 by 8.2%. However, the September data beat expectations and reinforced our long-held view that China will avoid a hard landing. We expect GDP growth to accelerate slightly in Q4. The 18th National Communist Party Congress has been scheduled for November 8. A large share of the top decision making body will be replaced, Xi Jinping is expected to become General Secretary of the Communist Party and President, while Li Keqiang will become Premier. Uncertainty surrounding the leadership changeover and the Bo Xilai scandal has muted the governments response to the economic slowdown. The Peoples Bank of China (PBoC) has held its key interest rate at 6.0% percent since the rate cut in early July. Instead, the central bank is using reverse repurchase agreements to inject liquidity into the money market. We expect the PBoC to hold the key interest rate steady for the remainder of 2012. Purchasing managers indices (PMIs) have stopped worsening but are still below the 50 level. The official PMI improved somewhat to 49.8 in September. The arguably more reliable Markit/HSBC PMI also improved slightly. (Chart 2) Price pressures are weak. Headline inflation decelerated slightly to 1.9% in September while food inflation decelerated to 2.5%. Core inflation printed at 1.7%. (Chart 3) Inflation is expected to increase moderately in Q4. Exports provided an upside surprise in September and increased by 9.9% in year-onyear terms. Imports are still rising slowly, however. (Chart 4) Both industrial production and retail sales accelerated in September. (Chart 5) New bank lending was weak in September at 623 bn yuan compared to more than 700 in August. However, weak bank lending was offset by growth in other forms of credit and the money supply grew at the fastest rate since June 2011. (Chart 6) The housing market is still weak. Housing prices are falling in year-on-year terms but at a slower pace. (Chart 7) Of 70 cities tracked, 31 saw price gains in September and 24 saw falls. Real estate transactions have recovered since the bottom in April. (Chart 8) The yuan (CNY) has started to appreciate against the USD again. (Chart 9)
Key data Percentage change

THURSDAY OCTOBER 18, 2012 Andreas Johnson SEB Economic Research +46 8 763 80 32 andreas.johnson@seb.se

2011 2012 2013 2014 GDP* Inflation* USD/CNY** 9.2 5.4 6.29 7.7 3.0 6.28 8.0 3.5 6.25 8.2 3.8 6.20

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

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