China Q3 GDP: A Slight Turn in Sentiment?

Chinese Q3 gross domestic product (GDP, a government-produced measure of economic output) hit the wires Wednesday, and something we find unusual happened: Instead of dwelling on the deceleration in year-over-year growth—the most widely cited headline metric, in our experience—most publications we follow highlighted the acceleration in quarter-over-quarter growth. We think this seems strange not just because the latter is relatively new and many economists we follow are sceptical about its methodology, but because we have seen pessimism toward China’s economy reign for quite some time.^[i] Seems to us people are starting to realise what we have long argued: China’s economy isn’t heading for a hard landing—a sharp economic contraction—and should keep contributing to global growth, helping stocks in the process.

In our view, Q3 and September monthly data (also out overnight) were more of the same: a return toward prepandemic trends. GDP growth eased from 6.3% y/y in Q2 to 4.9%, in keeping with the government’s long-running target of around 5%.^[ii] Industrial production rose 4.5% y/y in September, matching August’s rate, whilst retail sales accelerated from 4.6% to 5.5%.^[iii] All pretty pedestrian, in our view, if your reference point is China’s double-digit GDP growth rates in the 2000s and early 2010s.^[iv] But those are long gone, in our view, and current rates are pretty much right in line with the gradual deceleration since then.^[v] We think that, in large part, stems not from China perpetually weakening, but from the economy growing from an increasingly larger base. It looks to us like, after more than three years of lockdown-related dislocations, China’s economic indicators are finally reverting to longer-term trends.

We have seen a gap between sentiment and reality on this front for a few months now, with commentators we follow seemingly implying a return to normal growth rates is a slow-motion crash.^[vi] It seems to us the associated uncertainty weighed on sentiment, and if it is indeed clearing, as today’s coverage suggests it may be starting to, that should help stocks. The data may be backward-looking, but we find falling uncertainty can make people a bit more eager to take risk and bid stocks higher. It seems we may be getting this now, to some degree, with China’s economy.

Not that we think people are overly optimistic. Publications we follow may have led with the positive, but most coverage we saw noted that property markets remain a headwind. It used some version of China isn’t out of the woods yet. As in, consumers and factories may be regaining some footing for now, but property developers are still in a heap of trouble, and those chickens could yet come home to roost.^[vii] Home sales and housing starts may have inched up in September, but real estate investment dropped -8.8% y/y in the first three quarters.^[viii] That might be an ugly number, but the rest of China’s economy grew more than enough to offset it.^[ix] For all the talk of potential spillover, there is scant evidence, in our view.

We don’t dismiss property market headwinds, but—crucially for markets—they aren’t new. More than two years have passed since property developer Evergrande started missing bond payments, and the government has been slow-motion unwinding it ever since.^[x] Fellow troubled developer Country Garden has been in headlines for months and is now in default, along with a handful of other developers.^[xi] In our view, all this is very, very well-known to stocks and economic forecasters. It has been the focal point of financial coverage we have seen of China since about early 2022, if not sooner. If China’s output has demonstrated it can grow through two years of property woes, we doubt it becomes an insurmountable headwind now, especially with the government and central bank continuing to backstop the sector.^[xii] You might disagree with the specifics and whether every program in place makes economic sense (they likely don’t, in our view), but we don’t think stocks need policy perfection in China or anywhere. Containing the sector’s troubles is probably enough for global markets, in our view.

It can be easy for investors to get hung up on what is happening in China. It is the world’s second-biggest economy, and it tends to garner lots of attention amongst publications we follow.^[xiii] But when it comes to China’s impact on global developed markets, we think the question is pretty simple: Is sentiment toward its global economic contributions too optimistic, too dour or just right? In our view, it remains far from optimistic today, though it isn’t as deeply pessimistic as a few months ago. We think it seems more sceptical than anything—acknowledging that things weren’t as bad as initially thought but still focussing on headwinds. That scepticism should keep expectations low, making positive surprise—key fuel for rising stocks, in our view—easier to attain.