China’s Economy Grew Less Than Expected In Q3, But September Activity Data May Carry The Day

“Unscathed” isn’t the right word. Neither is “resilient.”

Rather than cycle through my mental Rolodex for better options, I’ll stick to a straightforward assessment: China is the only major economy in the world expected to grow in 2020.

While the latest updates from the IMF (out last week) did include materially improved forecasts for advanced nations, the prognosis is still dour. For emerging markets excluding China, the outlook is getting progressively worse.

But for the world’s second largest economy, things are going relatively well. Recent data, to the extent you can take it at face value, has been some semblance of encouraging. Industrial output bounced back quickly from the pandemic and has held up well since. PMIs are solidly in expansion territory. Credit growth is reasonably robust, as is trade data, considering the circumstances. Even retail sales managed to post a gain in August, the first since the onset of the epidemic.

That’s not to say there aren’t problems. Core inflation is disconcertingly low, for example, and China is still mired in factory gate deflation which one assumes doesn’t bode well for profits once the mechanical rebound from the pandemic plunge is behind us. Indeed, PPI deflation was a drag on corporate bottom lines in China prior to COVID.

But all in all, the “fundamentals are strong,” to roll out the old cliché. Or at least Beijing says they are, and all Twitter sarcasm aside, there’s a sense in which it’s futile to spend too much time deriding the data as “managed” or “massaged.” It just is what it is. And it’s what we’ve got to go on.

That brings us to Monday’s marquee numbers. The Chinese economy grew 4.9% YoY in the third quarter, below estimates. The market was looking for 5.5%. This marks the second consecutive quarterly gain following Q1’s unthinkable contraction. The range for Q3 was +2.5% to +6.2% from 31 economists.

Officially, China did an admirable job of containing the pandemic which started on its soil. Of course, the idea that the official figures from Beijing on infections and deaths are accurate is absurd. That’s not necessarily an attempt to cast aspersions as much as it is to state what, to rational outside observers, seems like common sense considering what we know about the transmissibility of the virus and the sheer number of people living in China.

All skepticism aside, though, there’s something to be said for the effectiveness of authoritarian regimes during periods when the public needs to be compelled to take precautionary steps they might not be inclined to take on their own. I have no hard data on authoritarian rule during public health crises, and clearly, a lot gets lost as imperatives and decrees are disseminated from the top down in China. But the point is simply that if the Party tells you to stay home and wear a mask, doing something like piling into the bed of a pickup truck with your friends and going on a joy ride to protest mask wearing and assert your civil liberties, would be an extremely ill-advised idea.

So, while we’ll never know how many people were infected and/or died from COVID-19 in China, it’s safe to say that any success the country has had in keeping the epidemic at bay since the dark days of February and March, can be traced at least partially to the style of government.

Now, the resurgence of the virus in Europe and its persistence in the US could potentially undermine the global recovery to the detriment of Chinese exports, although even there, the country has benefited from demand for pandemic-related goods.

This is why it’s crucial for domestic demand to hold up, and on that score, retail sales grew again in September, rising 3.3% YoY. That is more than double the 1.6% consensus expected.

Industrial production, which began posting gains again starting in April, rose 6.9%, well ahead of expectations and above the top-end of the range. Fixed asset investment came in basically in-line, while the surveyed jobless rate fell to 5.4%.

The bottom line: While Q3’s GDP print was a miss, any disappointment on that front could be offset by stronger-than-expected September activity data. That will almost surely be the narrative.

Chinese economic strength and the monetary policy divergence evident in the PBoC’s essentially neutral stance versus developed nations in full-on, race-to-the-bottom mode, combined to buoy the yuan, which turned in a stellar quarter in Q3, and eventually appreciated so much that Beijing moved to cap gains earlier this month.

Since then, the currency has regained all the ground lost after the PBoC tapped the brakes by relaxing a rule that made it more expensive to short. Consensus has coalesced around a view that the policy change for FX forwards notwithstanding, the PBoC has no desire to set about weakening the yuan materially at this juncture. Recent comments from officials regarding the extent to which the currency “reflects economic fundamentals” underscore the point.

Still, as Bloomberg’s Mark Cranfield wrote Monday, “the PBOC will also want to avoid the optics of USD/CNH becoming a one way bet lower.” That means “it’s all set up for a lively week of cloak and daggers where short-term yuan traders will need to pivot quickly from offense to defense to protect their P&L.”