China growth slows as policy changes yet to gain traction

China's economy grew at its slowest rate since the financial crisis, as Beijing's policy loosening has yet to stop the deceleration of investment, consumption and industrial production.

Chinese gross domestic product growth slipped to 6.5% for the third quarter of the year, down from 6.7% in the preceding quarter and lower than the 6.6% that economists had pencilled in.

Although economists expect further moderating of growth in the final three months of the year, the People's Republic still remains on track to meet its growth target of “around 6.5%” for 2018.

Household consumption growth dropped to 6.1% in the quarter, in real terms, from 8.8% in the second quarter, amid softer income growth. Despite a stronger than expected September's growth of 9.2%, retail sales growth fell to 6.4% in real terms, partly reflecting a deceleration in auto sales.

Industrial output slowed to 5.8% in September, down from 6.1% the month before and below the 6.0% forecast, dragging average growth in the whole third quarter to 6.0% from 6.6% in the second.

Fixed asset investment picked up in September to 5.4% but was still softer at 4.4% for the quarter amid earlier deceleration in infrastructure investment and softening of real estate activity. In September, housing sales fell 0.8%, while housing starts growth slowed to 17.7%, after a strong rise of 33.6% in the previous two months.

Real goods export growth picked up to an estimated 5.9% in the third quarter, from 2.8% in the second.

MORE POLICY CHANGES TO COME?

"Growth of 6.5% rather than 6.6% is a pretty nice problem to have but the trade war with the US, higher debt levels and a depreciating currency remain a concern," said Neil Wilson at Markets.com.

After Chinese stocks bounced on Friday, Wilson said this needed to be seen in the context of the three-year collapse in equities.

Looking ahead, economist Tianjie He at Oxford Economics said she thought the intensifying US-China trade conflict was the "key risk" to China’s export outlook, expecting higher US tariffs to start to weigh on China’s exports in the fourth quarter and recently downgrading her GDP growth forecast for 2019 from 6.1% to 6.0% due to the escalation of trade tensions.

Focusing on Beijing's potential policy moves, she added: "The major slowdown in credit growth this year has already raised speculations that China could ease its macro stance significantly, to support both the domestic and global economy. However, since the credit slowdown has been concentrated in shadow banking, it has a relatively small impact on the real economy. Indeed, real GDP grew 6.7% in the first three quarters of this year, after 6.9% in 2017. This strengthens our view that, barring more significant downward pressures, we do not expect a major policy easing through end-2019."

Julian Evans-Pritchard at Capital Economics saw some early signs in the September data that policy support from Beijing was "starting to gain traction" and he believed more easing will still be needed in order to stabilise growth. "We anticipate a further loosening of both monetary and fiscal policy in the coming months, which should put a floor under growth by about the middle of 2019."

Economists at Nomura, however, expect Beijing to unveil a range of further stimulus actions. These are likely to include cutting VAT, corporate taxes and social security taxes to boost corporate investment and production; more bond issuance by central government, local governments and policy banks; faster fiscal spending, especially on infrastructure investments; increasing commercial bank loan quotas and encouraging banks to increase lending to the private sector; taking a softer stance on state-owned enterprises, and more direct liquidity injections.