China Q3 GDP: A Slight Turn in Sentiment?

Chinese Q3 GDP hit the wires overnight, and an unusual thing happened: Instead of dwelling on the deceleration in year-over-year growth—the typical headline metric—most coverage highlighted the acceleration in quarter-over-quarter growth. This seems strange not just because the latter is relatively new and there are some questions about its seasonal adjustment methodology, but because pessimism toward China’s economy has reigned for so darned long. Seems to us folks are starting to realize what we have long argued: China’s economy isn’t heading for a hard landing and should keep contributing to global growth—helping stocks in the process.

In our view, Q3 and September 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%.”^[i] Industrial production rose 4.5% y/y in September, matching August’s rate, while retail sales accelerated from 4.6% to 5.5%.^[ii] All pretty pedestrian if your reference point is China’s double-digit growth rates in the 2000s and early 2010s. But those are long gone, and current rates are pretty much right in line with the gradual deceleration since then. In large part, that 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 people bemoaning a return to normal growth rates as a slow-motion crash. 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 falling uncertainty can make people a bit more eager to take risk and bid stocks higher. It seems we are now getting this, to some degree, with China’s economy.

Not that people are overly optimistic. Headlines may have led with the positive, but most coverage noted that property markets remain a headwind and 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. 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.[iii] That is an ugly number, but the rest of China’s economy is growing more than enough to offset it. For all the talk of potential spillover, there is scant evidence.

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. Fellow troubled developer Country Garden has been in headlines for months and is now in default, along with a handful of other developers. All this is very, very well-known to stocks and economic forecasters. It has been the focal point of financial coverage 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. You might quibble with the specifics and whether every program in place passes a detailed cost-benefit analysis (they likely don’t), but stocks don’t need policy perfection in China or anywhere. Containing the sector’s troubles is probably enough for global markets.

It is easy to get hung up on what is happening in China. It is the world’s second-biggest economy, and it gets oodles of headlines. But when it comes to China’s impact on global developed markets, the question is pretty simple: Is sentiment toward its global economic contributions too optimistic, too dour or just right? Today, it remains far from optimistic, though it isn’t as deeply pessimistic as a few months ago. It seems more skeptical than anything—acknowledging that things weren’t as bad as initially feared but still focusing on headwinds. That seems like a sizable wall of worry to us.