China's short-lived recovery sparks call for reform
A combination of softer exports and shrinking momentum from investments suggests the mainland's economic rebound may be short-lived, underscoring the need for reforms that strengthen the consumer sector and boost domestic demand.
The mainland's gross domestic product growth reversed a two-quarter slowdown in the third quarter of the year, accelerating to 7.8 per cent from 7.5 per cent in the second, driven by pro-growth policies introduced by Premier Li Keqiang since July that have boosted investment in railways and infrastructure.
However, as the effects of those policies eased, the overall momentum began to soften last month, indicated by slower growth in industrial production, fixed-asset investment and retail sales. Exports fell 0.3 per cent year on year last month.
Given the cooling growth momentum and rising inflationary pressures, the government is unlikely to add further easing policies, economists say, although some expect credit growth to be reined in in the fourth quarter amid abundant liquidity.
There may be no imminent threat to Beijing's success in meeting this year's 7.5 per cent growth target, most analysts believe. However, Li is facing more pressure to spur domestic demand through reforms, such as tax cuts and urbanisation, so as to trim reliance on exports and investment and pursue healthier long-term development.
"The pace of recovery is likely to be a modest one," HSBC economists Qu Hongbin and Sun Junwei said in a research note. "We expect Beijing to maintain the policy status quo in order to protect the recovery in growth, which in turn should create a favourable backdrop for speeding up structural reforms to boost long-term growth prospects."
Capital Economics said it expected GDP growth to slow next year to about 7 per cent from 7.5 per cent or so this year. "Our expectation that growth will slow depends on there being a pull-back in credit growth. This is the key indicator to watch over the next few months," it said.
Investment remained the biggest driver of the economy, contributing 4.3 percentage points to overall third-quarter GDP growth. Consumption contributed 3.5 percentage points.
Li decided to speed up building railways and subways in late July in order to stem a growth slowdown that had lasted two quarters. But the policy effect has gradually shrunk.
Investment in newly started projects grew 13.3 per cent in the first nine months, slower than the 12.2 per cent growth in the January-August period. Industrial production growth also eased, by two percentage points, to 10.2 per cent last month from August. Power output growth slowed to 8.2 per cent from 13.4 per cent.
Retail sales have been steady. But inflation surged to 3.1 per cent in September, a seven-month high.
ANZ Bank economist Paul Deane said the consumer price rise was largely driven by pork prices, which is likely to become a larger contributor next year.
Inflation may move towards 4 per cent around the second quarter of next year, assuming that no additional policies are introduced.