China - GDP rebound in Q3 driven by the supply side

China Macro: Real GDP shows a sharp rebound from lockdown slump in Q2

On Monday 24 October, China published its Q3 GDP data and September activity data, almost one week later than initially scheduled. Although the publication delay added to market concerns, GDP data came in stronger than expected. Real GDP growth accelerated to 3.9% yoy in Q3 (Q2-22: +0.4%), which was better than market expectations (3.3%) but closer to our forecast of 3.6%. Quarterly growth came in at 3.9% qoq, while the contraction in Q2 was revised slightly, to -2.7% qoq (from -2.6%). The sharp rebound in GDP growth did not come as a surprise to us, as this mainly reflects payback from the slump in Q2 (with its nadir in April), when the Omicron wave caused broad lockdowns including in megacities such as Shanghai, Beijing and Shenzhen. Moreover, the rebound also reflects the impact of support measures in the form of piecemeal monetary easing, targeted fiscal support and a relaxation of macroprudential measures including for real estate. Bloomberg’s monthly GDP estimate rose to 6.1% yoy, the highest reading since February. Meanwhile, despite the better than expected Q3 GDP numbers, the CNY (versus USD) and the Chinese stock market traded lower initially, suggesting that financial markets do not judge the outcome of the CCP summit as market friendly. As we do not expect a quick turnaround in Covid-19 policy following the summit and with global growth clearly coming down, we have lowered our growth forecasts for 2022 (to 3.5%, from 3.7%) and 2023 (to 5.2% from, 5.6%).

September data show rebound is driven by supply side, as ‘Zero-Covid’ keeps constraining consumption

The September activity data once more illustrates that the rebound from the Q2 slump is driven by the supply side, as Beijing prioritised normalising production and transport. Industrial production came in much stronger than market expectations, at 6.3% yoy (August: 4.2%, consensus: 4.8%). Fixed investment growth accelerated slightly, to 5.9% yoy ytd (Jan-August: 5.8%, consensus: 6.0%). This acceleration was driven by infrastructure investment, while the property investment slump deepened even further. Retail sales growth slowed significantly compared to last month and came in weaker than expected, at 2.5% yoy (August: 5.4%, consensus: 3.0%). This confirms that pandemic flare-ups and strict Covid-19 policy continue to leave their mark on consumption. Foreign trade data point to a further slowing of export growth in line with the cooling of global demand, although import growth is much weaker reflecting the state of domestic demand. Meanwhile, the unemployment rate picked up again, to 5.5% (August: 5.3%, consensus: 5.2%), with youth unemployment still at a very high 17.9%.