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China economy stabilises in Q3, but systemic risks remain: analysts

To avoid a bubble in the real estate market, which makes up roughly a quarter of the GDP, the government has already started to curb purchases in major cities.


CHINA'S economy stabilised in the third quarter as the country's gross domestic product (GDP) expanded 6.7 per cent, but analysts have warned that systemic risks remain, including a red-hot property market and slow progress in structural reform.

Chua Han Teng, senior Asia analyst with BMI research, said: "The GDP growth prints for the first three quarters reflect the fact that the Chinese government is unwilling to allow official growth to fall below its 6.5-to-7 per cent target range."

China's economy grew 6.9 per cent last year, its slowest growth rate in 25 years, as global growth failed to pick up, and debt and over-capacity weighed on the domestic front.

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To avoid a sharp slowdown, which could stem social unrest, the government shifted its focus from pursuing reform to propping up growth; it implemented a slew of measures, including boosting state-led investment.

In the next five-year plan running to 2020, Beijing has set an overall growth target of 6.5 to 7 per cent, which analysts have criticised as being too high.

Over the past two months economic data has pointed to a stabilisation of growth, with many economic indicators rebounding and the property sector growing at a worrying pace.

Last month alone, retail sales rose 10.7 per cent on-year, higher than the on-year figure for August.

Fixed-asset investment was 8.2 per cent up in the first nine months of the year; property investment rose 7.8 per cent in September year on year, and property sales surged 34 per cent.

Marie Diron, associate managing director at Moody's Investors Service, said: "In particular, very rapid growth in sales of commercial and residential buildings is likely partly related to measures implemented in 2014 and 2015 to ease access to mortgages.

"Although household debt is currently low, increased reliance on construction and real-estate activities exposes the economy to a reversal in these markets."

Analysts say that the pickup of economic activity comes at the cost of delaying structural reforms, which include deleveraging and restructuring state-owned enterprises, especially those in the steel, cement and coal sectors.

Figures released on Wednesday showed that crude steel production still rose 3.9 per cent year on year in September - despite repeated pledges to cut over-capacity and excess production.

Looming debt is also a worry, with both the International Monetary Fund (IMF) and the Bank for International Settlements having warned lately that China was not immune to a banking crisis.

Data released on Tuesday showed that new loans by Chinese banks in September surged nearly 30 per cent over the level in the previous month.

To avoid a bubble in the real estate market, which makes up roughly a quarter of the GDP, the government has already started to curb purchases in major cities. These measures should have a small downward effect on GDP in the coming quarters.

However, in the long term, analysts say the government will have to implement more structural reforms, no matter how painful they are, and despite their tendency to lead to volatility and slower growth.

Andy Rothman, strategist at Mathews Asia, said: "The challenges of completing this transition will result in gradually slower growth rates and increased volatility, but the risks of a hard landing are very low.

"But cleaning up the country's debt problem will be expensive."

China hopes that consumer spending will gradually replace investment as the engine for growth, leading to a more efficient and healthier economic structure.

On the upside, figures released on Wednesday show that a rebalancing of the economy is happening - albeit slowly.

During the first nine months of the year, final consumption contributed to 71 per cent of China's GDP growth, up from roughly 58 per cent in the corresponding period last year.

Growth in the secondary sector slowed from 6.3 per cent to 6.1 per cent in the third quarter; in the services sector, it rose to 7.8 per cent from 7.5 per cent over the same period.

Ms Diron from Moody's said: "We expect economic growth to stay at around 6.5 per cent this year, as policy support continues to bolster economic activity.

Longer-term economic rebalancing, corporate deleveraging, if it is effective, and less favourable demographics will be some of the factors dampening GDP growth."

BMI Research revised up its annual GDP forecast to 6.6 per cent.