China's Q3 GDP Beats Forecasts, Retail Sales Accelerate, but Property Investment Remains a Concern

What happened

China's economy exceeded expectations in the third quarter, with Gross Domestic Product (GDP) growing 4.5% year-on-year, above the projected 4.4% and accelerating from 4.3% in the second quarter. On a quarterly basis, GDP expanded 1.2%, also beating the 1.1% expectation. September data showed industrial output grew 5.5% year-on-year, its fastest pace in six months, supported by exports of AI-related technology goods. Retail sales increased 1.1% in September, the fastest growth since March and more than double the August figure.

However, investment remained the weak link. Fixed asset investment fell 7.2% in the first nine months of the year, while property investment plunged 20.6% over the same period. Infrastructure investment also declined 4.2%, despite government measures aimed at reviving it. Growth for the first nine months of the year was 4.6%, within Beijing's annual target range of 4.5% to 5.0%.

Why it matters

The data indicates a two-speed economic recovery in China, where industrial output and exports, benefiting from the global technology boom, offset the weakness in domestic consumption, private investment, and the troubled property market. GDP growth within the official target reduces pressure on policymakers to implement large-scale stimulus, suggesting that Beijing may continue to rely on more targeted support measures. This approach, however, may not be sufficient to address the structural problems in consumption and the property sector.

Reliance on exports also carries risks, such as an increasing trade surplus, which could heighten trade tensions with partners like the European Union. The persistent weakness in property investment is particularly concerning, given its weight in the Chinese economy, and suggests that despite some localized improvements, the sector still faces deep challenges.

Market impact

• Interest rates and bonds: The lack of need for aggressive stimulus may limit enthusiasm for Loan Prime Rate (LPR) cuts, keeping Chinese bond yields relatively stable or with slight upward pressure if risk perception decreases. However, property investment weakness still warrants attention.
• Dollar and FX: Improved Asian risk sentiment tends to support currencies linked to global growth and commodities, such as the Australian dollar (AUD) and New Zealand dollar (NZD). The US dollar may see a slight depreciation against these currencies, but the overall impact could be mitigated by caution regarding Chinese investment.
• Equities: The macroeconomic data relief may generate positive risk sentiment for Asian equities in general. However, the lower likelihood of aggressive stimulus may cap enthusiasm for Chinese equities, which are already leaning on state support. The decline in property investment continues to be a drag for related sectors.
• Commodities: Stronger industrial output and increased retail sales in China, the world's largest crude importer, offer support to oil demand, especially amid elevated supply risks. For industrial metals and iron ore, the message is mixed: stronger factory activity helps, but a sharp drop in property investment is a clear drag on construction demand.
• Brazil: Support for commodity demand, especially oil and iron ore (though with caveats for the latter due to the property sector), could be marginally positive for the real and for Brazilian commodity-exporting companies. However, caution regarding the Chinese economy, particularly in the property sector, may limit more significant gains.

What to watch

Investors should closely monitor China's Loan Prime Rate (LPR) decision, scheduled for Tuesday, which will provide the next signal on Beijing's policy stance. Furthermore, it is crucial to observe any new announcements of targeted stimulus measures, especially for the property sector and domestic consumption. The evolution of trade tensions with the European Union and other partners will also be an important factor.

Scenarios

Base Case: The Chinese economy continues to show moderate and uneven growth, with the government opting for targeted stimuli rather than broad measures. The industrial sector and exports maintain pace, while consumption and property investment recover slowly. Risk Scenario: Weakness in the property sector and domestic consumption deepens, requiring Beijing to adopt more aggressive stimulus than expected, or, alternatively, leading to below-target growth with negative impacts on global risk sentiment.

Original source: ForexLive (InvestingLive). For information only, not investment advice.