A Mid-Autumn Look at the Middle Kingdom

Stop us if this sounds familiar: Chinese GDP 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 focused on the government’s measures—and whether they are sufficient. But a look under the hood suggests China’s longer-running economic trends remain intact—and for investors, that better-than-appreciated reality is likely enough to exceed dour expectations.

First, the numbers: Q3 GDP rose 4.6% y/y, slowing from Q2’s 4.7% but exceeding expectations of 4.5%.^[i] On a value-added basis, services 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 while 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: The latest numbers weren’t horrid, but things could get worse quickly if policymakers didn’t act. Thus, most coverage focused 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 program last Friday to support the stock market (by providing credit for share buybacks). China’s central bank also reiterated plans to cut the one-year loan prime rate and further lower the reserve requirement ratio to encourage banks to lend. 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. Others anticipate additional aid after the National People’s Congress meets later this month.

But take a step back. For all the calls for the government to do something, the latest numbers don’t 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. But as in the West, economic normalcy has 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 10/22/2024. Year-over-year change (percent) in Chinese GDP, Q3 2014 – Q3 2024.

Now, the economy is by no means firing on all cylinders. Retail sales and industrial production’s growth rates have been rather stuck in recent months, as evidenced by September’s results. (Exhibit 2) They also rightly 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. 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.

But these issues are also very well-known, structural rather than cyclical—much like the eurozone and Japan’s long-running structural issues. Such things don’t prevent expansion, and the latest data show China is indeed expanding even if retail consumption is something of a caboose. Besides, as in the US, spending on goods doesn’t tell the whole consumer spending story. If services are growing at a fine clip despite retail sales’ lag, then things are probably better than the headline monthly data imply. Note, too, this growth occurred before most of the government and central bank’s stimulus measures were even announced, let alone implemented.

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

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

For investors, the coverage’s myopic focus on what policymakers can or will do to support growth points to lingering skepticism. As we wrote at September’s end, the monetary and fiscal measures garnered a lot of attention, with China optimists hopeful they would constitute an economic shot in the arm. That chatter hasn’t stopped, 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 the need for that shot in the arm is much smaller than advertised, which implies more room for global markets to climb the wall of worry as China’s contributions to global GDP continue.

So stay focused on the right things and keep your expectations in check. For investors concentrating on the developed world, the key is that China’s economy doesn’t need a massive wall of stimulus to avoid a hard landing. The latest data indicate abundant government “help” is more a nice to have than a need to have. Keep this longer-term perspective and try 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 rumored spending cheers markets. These market moves are sentiment-based, 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.