A Mid-Autumn Look at the Middle Kingdom

Stop us if this sounds familiar: Chinese gross domestic product (GDP, a government-produced measure of economic output) growth cooled and policymakers reiterated their commitment to supporting the economy. That well-worn record played again last Friday after China announced Q3 GDP and officials hyped plans aimed at instilling investor confidence. Most coverage we read focussed on the government’s measures—and whether they are sufficient. But a look under the bonnet suggests China’s longer-running economic trends remain intact—and for investors, that better-than-appreciated reality is likely enough to exceed dour expectations, in our opinion.

First, the numbers: Q3 GDP rose 4.6% y/y, slowing from Q2’s 4.7% but exceeding analysts’ consensus forecasts of 4.5%.^[i] On a value-added basis (another measure of economic output), the services sector grew 4.7% y/y, behind industry (5.4%) and ahead of agriculture (3.4%).^[ii] Widely watched monthly retail sales and industrial production delivered some positive figures, too. The former—a proxy for domestic demand and household spending—rose 3.2% y/y (and 3.3% year to date) in September whilst the latter climbed 5.4% y/y (5.8% year to date) after high-tech manufacturing offset construction weakness.^[iii] Overall, GDP was up 4.8% year to date versus 2023’s first three quarters, loosely on target to hit the government’s 2024 goal of around 5%.^[iv]

The general reaction to the data based on the financial headlines we reviewed: The latest numbers weren’t horrid, but things could get worse quickly if policymakers didn’t act. Thus, most coverage focussed on recent fiscal and monetary support measures—some yet-to-be launched, some now underway. For example, the People’s Bank of China (PBOC) rolled out a programme last Friday to support the stock market (by providing credit for share buybacks).^[v] China’s monetary policy institution also reiterated plans to cut the one-year loan prime rate and further lower the reserve requirement ratio to encourage banks to lend.^[vi] Outside monetary policy, President Xi Jinping’s comments about science and technology’s role in future growth buoyed moods within the relevant sectors, with many analysts concluding government support for those industries would follow.^[vii] We saw others speculate that additional government aid would be forthcoming after the National People’s Congress meets later this month.^[viii]

But take a step back. For all the calls for the government to do something, we don’t think the latest numbers indicate any unusual need. Q3 GDP is in line with the longer-running, slowing trend. (Exhibit 1) Like other major economies, the pandemic skewed China’s data in a major way, as evidenced by the large decline in Q1 2020 and big year-on-year rebound in Q1 2021. But as in the West, economic normalcy appears to have returned in recent quarters—and in China’s case, recent GDP growth is continuing where it left off before COVID.

Exhibit 1: Chinese GDP Growth Over the Past Decade

Source: FactSet, as of 22/10/2024. Year-over-year change (percent) in Chinese GDP, Q3 2014 – Q3 2024.

Now, the economy isn’t necessarily firing on all cylinders, in our view. Retail sales and industrial production’s growth rates have been rather stuck in recent months, as evidenced by September’s results. (Exhibit 2) We have seen this trend raise questions about whether officials are relying too much on old growth engines—heavy industry and exports—to compensate for weaker domestic demand. Shifting to a more services- and consumption-driven economy is one of the government’s long-running and well-known goals.^[ix] According to our research, the economic efficacy of a focus on manufacturing and infrastructure development has waned over time, and if industrial production is only papering over longer-running cracks in domestic demand, then that raises some long-term questions about future growth.

But based on our research, these issues are also very well-known, structural rather than cyclical—much like the eurozone and Japan’s long-running structural issues.^[x] According to our studies, such things don’t prevent expansion, and the latest data show China is indeed expanding even if retail consumption is something of a laggard. Besides, we don’t think spending on goods tells the whole consumer spending story—services comprise a large share of spending, too.^[xi] If services are growing at a fine clip despite retail sales’ lag, then we think things are probably better than the headline monthly data imply. Note, too, this growth occurred before most of the government and monetary stimulus measures were even announced, let alone implemented.

Exhibit 2: China’s Retail Sales and Industrial Production Over the Past 12 Months

Source: National Bureau of Statistics of China, as of 18/10/2024.

For investors, we think the coverage’s focus on what policymakers can or will do to support growth points to lingering scepticism. As we wrote earlier this month, the monetary and fiscal measures garnered a lot of attention amongst China observers, with optimists hopeful they would constitute an economic shot in the arm. We haven’t seen that chatter cease, with analysts poring over the president’s speeches about the domestic tech sector and estimating how much support legislators will approve. Meanwhile, with GDP growth keeping pace, it seems to us the need for that shot in the arm is much smaller than advertised, which we think implies more room for global markets to climb the proverbial wall of worry as China’s contributions to global GDP continue.^[xii]

So we think investors benefit from staying focussed on the issues that our research finds matter to markets and keeping expectations in check. For investors concentrating on the developed world, the key is that Emerging Market China’s economy doesn’t need a massive wall of stimulus to avoid a hard landing, in our opinion. The latest data indicate to us that abundant government help is more a nice to have than a need to have. We suggest keeping this longer-term perspective and trying not to get distracted by the sharp market volatility (both positive and negative) that has surrounded support measures—e.g., a monetary proposal disappoints investors or larger-than-anticipated rumoured spending cheers markets.^[xiii] These market moves are sentiment-based, in our view, subject to unpredictable swings in emotion—and not something to base an investment decision on.

For global investors, we think the simple takeaway is that China continues to chug along and contribute to the global economy. Not all is great—the property market remains in a soft patch—but overall, the world’s second-largest economy growing steadily is good enough for global markets.^[xiv]