China’s GDP may have surged 9.4% in 3Q11

In light of mounting concerns over imminent threat of hard landing in China, the release of 3Q11 GDP growth will likely disappoint the bears. Real GDP is projected to advance 9.4% in 3Q, versus consensus estimates of around 9.3%. Our relative optimism stems from (1) Resilient external trade; and (2) Steady advance of investment due to construction of social housing at full throttle.

Although the European sovereign debt crisis started deepening as early as May, trade performance hitherto has been quite positive. Exports and imports for 3Q11 advanced 20.5% YoY and 24.8% versus 22.1% and 23.1% in 2Q11 respectively. The trade surplus for 3Q that totaled USD63.8bn is even higher than 2Q that amounted to USD46.5bn.

Even exports to the EU performed better than expected, as they advanced 18.1% in 3Q versus 16.6% in 2Q. Pent-up export demand in 3Q as a result of the earthquake in Japan earlier this year explains the robustness of the trade figures.

Investment, which accounted for 54% of growth in 2010, will remain a key growth driver. While headline urban FAI growth has decelerated since May, real estate investment (accounting for more than a quarter of urban FAI) has grown 33% on average in the last three months. This trend helps buttressing FAI growth at 24.8% YTD
in September. As far as private consumption is concerned, the resilience of nominal retail sales hovering steadily at the 17% threshold suggests inflation has not yet bitten seriously into consumption on the back of rising real wages nationwide. Otherwise, retailers should have already started cutting prices to lure purchases. Private consumption thus held up reasonably well in 3Q11.

Gradual slowing of the economy is an intended policy outcome of an 18-month-long monetary tightening program. Yet the battle against inflation is not yet over. Non-food inflation has remained sticky averaging 2.9% for both 2Q and 3Q. Food inflation also keeps rotating from one food item to another with each passing month. As a result, the headline CPI in 3Q averaged 6.3%, well above the 4% target set by PBoC and much higher than the current one-year deposit rate at 3.5%.

Make no mistake - it is the persistent elevation of the reserve requirement ratio that succeeded in slowing down M2 growth to 13% in 3Q11. (One-year lending rate in real terms is even lower now than last year.) Along the way, it also helps choking off liquidity to businesses that reliant heavily on easy availability of cheap credit (mostly
small to medium property developers).

The achievement of 9.4% growth in 3Q11 amidst a chaotic global environment is not an easy feat, suggesting a soft landing is in sight.