China’s economic growth eases to 9.1% in 3Q11

China's GDP growth continues to moderate, rising by 9.1% y-o-y in Q3 in response to policy tightening. But both sequential GDP growth (+2.3% q-o-q, sa) and September growth data remain strong, confirming our view of a soft landing. While external slackness will likely bite China's exports growth in the coming months, the strength of domestic demand should keep the economy growing at around 8.5-9% in the coming quarter. Fiscal tweaks and targeted support for SMEs should help China avoid a hard landing, making an across-board easing in monetary policy unlikely in the immediate future.

Facts
Chinese economy growth slowed to 9.1% y-o-y in 3Q from 2Q's 9.5% y-o-y and from 9.7% y-o-y in 1Q. The result was a touch lower than market expectations for 9.3% but largely in line with ours (9%). Seasonally adjusted q-o-q growth eased to 2.3% in 3Q from 2.4% in 2Q.

By sector: primary industries picked up to 3.8% y-o-y in the first three quarters from 3.2% y-o-y in 1H, growth of secondary industries eased to 10.8% y-o-y in the first three quarters from 11% y-o-y in 1H and growth of services industries slowed to 9% y-o-y in the first three quarters from 9.2% y-o-y in 1H.

Although slower growth had been expected by the markets in response to quantitative tightening, September's industrial production and retail sales all surprised to the upside.

IP growth picked up to 13.8% y-o-y in September from 13.5% y-o-y in August, beating Bloomberg consensus expectations of 13.4% y-o-y. Seasonally adjusted, IP growth quickened to 1.2% m-o-m (vs. 1.02% m-o-m in August). This better than expected IP print was driven by activity within heavy industries - which saw growth accelerating to 14.3% y-o-y in September from 13.5% y-o-y in August (contributing to 0.6ppt to IP growth vs. 0.7ppt cut in August). Growth of light industries dipped to 12.8% y-o-y in September from 13.4% y-o-y in August - consistent with the slowdown in exports growth.

Retail sales growth expanded by 17.7% y-o-y in September, beating 17% y-o-y in August and market expectation (17%). Seasonally adjusted m-o-m growth rate picked up to 1.35% in September from 1.36% in August. In real terms, retail sales growth remained steady at 11.8% y-o-y. Notably, car sales expanded by 18.7% in September compared with 12.4% y-o-y in

August.

The resilience of consumer consumption is supported by still fast real income growth: disposable income for urban households was up 7.8% y-o-y in the first three quarters (vs. 7.6% in 1H); while cash income for rural households was up 13.6% y-o-y in the first three quarters (vs. 13.7% in 1H).

Implications:
Today's growth data flows confirm our view of a soft-landing for the Chinese economy. Despite the ongoing impact of quantitative tightening and initial signs of external slackness, both the y-o-y and sequential growth rates of GDP are still holding up well. Moreover, the upside surprises in September IP and retail sales data further underlines the strength of domestic demand, supported by ongoing infrastructure investment, accelerated public housing construction and resilient consumer consumption boosted by rapid income growth.

Going forward, we reckon growth is likely to continue to slow to 8.5-9% y-o-y in 4Q, in light of the following:

Firstly, although the PBoC has ended its 12-month intensive tightening cycle, the lagged impact of quantitative tightening will last a while longer. This, plus the ongoing property cooling measures, will likely to weigh on investment growth to our expected 21.5% by year end.

Secondly, the sluggish growth of western economies will continue to weigh upon China's exports. Although September's exports held up relatively steady (see China Exports (Sep): Feeling the chill from West, but still steady, published 13 October 2011), shipments to G3 markets have weakened significantly and is set to bite China's exports growth in the coming months.

Nonetheless, a hard-landing is unlikely in our view. We maintain our 8.9% whole year GDP forecast this year and 8.6% for next year.

Even if western economies slip into a renewed recession, the impact on China's growth should be much smaller than three years ago. China has been much less dependent on external demand with nearly zero contribution by net exports in 1H this year (compared with the average of 2.4ppts during 2005-2007).

Bottom line: Growth is slowing amidst policy tightening but the underlying strength of domestic demand should ensure a soft-landing. We reiterate our forecast of around 9% GDP growth for this year and steady monetary policy in the coming months.