China’s Q3 GDP growth set to pick up as exports power ahead

Beijing anticipates China's economy to have slightly accelerated in the third quarter of 2023, driven by strong demand for its technological products and additional government support, although sustained momentum may necessitate further stimulus. Beijing has heavily relied on exports for growth this year, but this growth engine is facing pressures as investment in AI-related industries dwindles and trade tensions with the European Union intensify.

The strategy of reallocating credit and resources from property to high-tech sectors has resulted in a two-speed economy, with robust factory output and exports overshadowing weak consumption and private investment. The projected GDP growth for July-September is expected to be 4.4%, a slight increase from the 4.3% growth in the previous quarter, marking the weakest pace in over three years.

While growth remains near the lower end of the government's target range, recent data indicate a notable improvement in economic momentum, fueled by robust exports, a recovery in manufacturing activity, and the early impacts of policy easing, according to Zhou Hao, chief economist at Guotai Junan International. The official manufacturing purchasing managers' index (PMI) revealed a rise in factory activity in September, marking two consecutive months of expansion, while a private manufacturing PMI indicated a five-month high in activity growth.

The economy is projected to have expanded by 1.1% on a quarterly basis in the third quarter, up from 0.9% in the previous quarter, as per the Reuters poll. China's trade surplus expanded beyond expectations in September, due to a surge in exports, positioning the country to surpass last year's record surplus of $1.2 trillion and possibly escalating trade disputes with significant trading partners.

The European Union's agreement to curb Chinese hybrid-vehicle exports could negatively impact the booming auto trade. GDP data is scheduled for release on Monday at 0200 GMT. September activity data is anticipated to show a pickup in industrial output growth to 5.5% year-on-year from 5.2% in August, while retail sales growth is expected to rise slightly to 0.6% from 0.4%.

Fixed-asset investment in the first nine months of the year is forecast to decline by 7.3%, compared to a 7.2% decline in the first eight months. GDP growth is projected to tick up to 4.5% in the fourth quarter, bringing full-year growth to the same level, before tapering to 4.4% in 2027, according to the poll. In late September, Beijing unveiled a fresh set of support measures, such as targeted interest-rate cuts and mortgage subsidies, following the cabinet's pledge for stronger action to bolster growth and meet its annual target.

Authorities also allocated 550 billion yuan ($82 billion) in unused government debt quotas to alleviate local government financial pressures and promote infrastructure spending. There is still room for additional support measures, including policies to boost employment and incomes and other actions to stimulate domestic demand, according to Lynn Song, ING's chief Greater China economist.

Further support measures, such as policies to boost employment and incomes and other actions to spur domestic demand, may still be necessary if economic momentum remains subdued into the year-end. Policymakers may respond with further fiscal stimulus and a broader easing of monetary policy if economic momentum remains weak. Analysts expect the central bank to maintain its benchmark lending rates, loan prime rates, and banks' reserve requirement ratio unchanged through the first quarter of 2027.

An upcoming Politburo meeting and the annual Central Economic Work Conference in December could shed light on Beijing's policy priorities for the following year.