Chinese Economic Growth Accelerates in Q3, Fueling Optimism Across Asian Markets

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China’s economic growth rebounded to 4.9% in the third quarter from a year earlier, beating economists’ expectations of 4.4% growth according to a Reuters poll. The world’s second largest economy also posted stronger than expected retail sales in September, while urban unemployment fell to its lowest level since November 2021.

The better-than-forecast data will likely boost optimism that China can achieve, or even surpass, the government’s full-year growth target of around 5% for 2022. However, some economists warn it may be premature to call a bottoming out of the slowdown, as pent-up demand from the Golden Week holiday may fade and the property sector has yet to fully recover.

In the July-September quarter, China’s gross domestic product (GDP) rose 4.9% from the same period a year ago, the National Bureau of Statistics said on Wednesday. This was above the median forecast of 4.4% growth in a Reuters poll of analysts and a rebound from the second quarter’s tepid 0.4% year-on-year increase.

On a quarterly basis, GDP grew 3.9% in July-September, quickening from a 0.4% pace in April-June.

“The national economy maintained the momentum of recovery and growth in the third quarter,” the bureau said in a statement.

September retail sales rose 5.4% from a year earlier, beating expectations for a 4.9% increase. This was up from August’s 5.4% growth and marked the quickest expansion since June.

Urban joblessness stood at 5.2% last month, improving from 5.3% in August and marking the lowest rate since November 2021.

The better economic data will be welcomed by Beijing, which has pushed local governments to shore up growth with increased infrastructure spending, COVID easing measures and incentives for real estate investment.

Authorities have also shifted to a data-driven approach on COVID restrictions, removing some of the earlier uncertainties around lockdown risks.

“The Chinese economy continued to recover in Q3, with growth beating expectations,” said Louis Kuijs, chief Asia economist at S&P Global Ratings.

“Stimulus and Covid policy normalisation are putting a floor under growth in the face of still weak external demand.”

Nomura Raises 2022 Growth Forecast

Following the solid Q3 figures, Nomura raised its GDP growth forecast for China to 5.1% for this year, up from 4.8% previously.

“Beijing may have to step up its efforts to stabilize growth again at that time,” Nomura economists said, warning of a likely slowdown toward late 2022 or early 2023 once pent-up demand fades after the Golden Week holiday.

The government has rolled out a flurry of policies in recent months to prop up the faltering economy, including providing credit support for infrastructure projects, and lifting some Covid restrictions to restore normality in everyday life.

However, several economists warn headline growth figures may mask lingering weakness. Data last week showed imports contracted for the first time since May 2020, expat capital outflows accelerated and credit growth was lacklustre, suggesting demand remains fragile.

Trefor Moss, analyst at TS Lombard said: “The (Q3 GDP) rebound was driven by the ‘old economy’ of infrastructure and property investment, boosted temporarily by loosened Covid restrictions and government directives. This is not indicative of a healthy, growing economy or a sustainable private sector recovery.”

There are also concerns about rising global recession risks as major central banks aggressively tighten monetary policy to combat soaring inflation, which could dampen Chinese exports in coming months.

September exports already showed signs of losing steam, highlighting the external risks to the economy. ANZ analysts estimate October exports likely fell 2% from a year earlier.

Country Garden Says It Cannot Meet Offshore Debt Obligations

Adding to the challenging economic environment, Chinese property developer Country Garden Holdings said on Wednesday it does not expect to be able to meet all of its offshore debt obligations.

The admission came after the grace period for a $15 million bond coupon payment expired, marking the company’s likely default on its offshore debt.

In a statement, Country Garden said it hopes to seek a “holistic solution” to resolve its difficulties, which reflect the deep malaise in China’s property sector following a government clampdown on excessive borrowing.

Several other major Chinese developers have also defaulted on offshore debt obligations in recent months, including China Evergrande Group and Kaisa Group Holdings Ltd.

The liquidity squeeze in the massive property sector has dampened investor and homebuyer sentiment, weighing heavily on the economy. New construction starts measured by floor area fell 16.85% year-on-year in the January-September period, the largest decline since the first nine months of 2006.

China Stocks React Cautiously To Data

Asian markets traded mixed following the Chinese data, with stocks paring earlier gains.

Hong Kong’s Hang Seng index dipped 0.3% in the afternoon session, giving up morning advances. The Shanghai Composite similarly erased early gains to trade down 0.8%.

Chip manufacturing giant TSMC slipped 1.2% in Taiwan after the U.S. announced new restrictions on exports of artificial intelligence chips to China. SMIC, China’s largest homegrown chip manufacturer, bucked the downtrend by rising 2.5%.

Japan’s Nikkei 225 and South Korea’s Kospi index both closed marginally higher.

U.S. stock futures pointed to a flat open on Wall Street, with the S&P 500 set for a subdued start following solid gains on Tuesday. Treasury yields rose further, topping 4.8% as investors continued to reprice expectations for more aggressive Fed tightening.

Overall, Asian investors digested the Chinese data with some optimism about near-term growth but remained cautious about downside economic risks.

“Despite the stronger-than-expected Q3 GDP numbers, we see plenty of headwinds to growth due to the deepening property market rout, sluggish retail sales growth and weakening exports,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Key Stock Moves:

  • BYD Co Ltd (HK:1211) — Chinese electric vehicle maker BYD forecasts Q3 net profit to almost double from a year earlier on strong sales. However, the stock fell 6.4%.
  • Foxconn (TW:2317) — Shares of Taiwanese assembler Hon Hai Precision Industry dropped 0.5% after the U.S. announced limits on AI chip exports.
  • Country Garden Holdings (HK:2007) — Property developer Country Garden plunged over 10% after saying it cannot meet offshore debt obligations.
  • SMIC (HK:981) — China’s largest domestic chipmaker gained 2.5% despite the U.S. semiconductors restrictions.

Market Wrap:

  • Hang Seng: -0.3%
  • Shanghai Composite: -0.8%
  • Nikkei 225: flat
  • Kospi: +0.1%

Outlook:

The better than expected Chinese GDP data offers some relief for the world’s second largest economy after a turbulent year disrupted by strict zero-COVID policies, regulatory crackdowns across sectors, and a property crisis. However, the recovery remains uneven, with risks tilted to the downside.

Much will depend on the longevity of government stimulus and how long pent-up demand can drive growth following the easing of COVID curbs. The export outlook hinges on avoiding a severe global downturn. Meanwhile, the property sector continues to drag on the economy despite some policy support.

With Beijing’s 20th Party Congress now concluded, investors hope greater policy certainty and stability will prevent a sharper slowdown. But economists caution that achieving around 5% annual growth this year still faces headwinds, especially if export and housing market weakness persists.

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