China’s third-quarter GDP growth report is chock full of contradictions. Though the 7.8% year-on-year growth rate was only the second in the past 10 quarters to represent a pick up in the pace of growth from the previous quarter, that was largely because of investment spending. A slowing of the growth in factory output and retail sales, along with September’s exports fall suggests there is little sustainable momentum to the economy’s recovery. With inflation hitting a seven month high, policymakers are more likely than not to rein in the credit growth that has accompanied the investment spending, a further potential brake on growth.
More broadly, the economy has to be switched away from its reliance on investment spending and exports to generate growth and towards domestic consumption. That implies a long-term slowing of growth. Yet government spending accounted for an estimated quarter of all infrastructure spending in the first nine months of this year, against a more typical 15-20%. As this Bystander has noted before, for all the good intentions over rebalancing, the old habits of goosing the economy when growth slows are dying hard.
The third-quarter number may serve to boost the annual GDP average so it clears the official annual targets. Growth for the first nine months of this year is 7.7%, against a full-year target of 7.5%. Yet its latest quarterly rise does not necessarily signal that the economy is moving in the right direction for the long term.