China GDP: Services saves economy as manufacturing slumps

Employees work at a production line of electronic panels at a factory of FiberHome Technologies Group, in Wuhan, China.
Employees work at a production line of electronic panels at a factory of FiberHome Technologies Group, in Wuhan, China. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's economy expanded quicker than economists forecast in the third quarter as the services sector propped up the world's second-largest economy, suggesting monetary and fiscal stimulus is keeping Premier Li Keqiang's 2015 expansion target within reach.

Gross domestic product rose 6.9 per cent in the three months through September from a year earlier, the National Bureau of Statistics said on Monday (Oct 19), beating economists' estimates for 6.8 per cent. Still, that was the slowest quarterly expansion since the first three months of 2009, based off previously announced data.

A stronger services sector and robust consumption are helping offset weakness in manufacturing and exports. The government has cut interest rates five times since November and boosted infrastructure spending in recent months to keep growth from sliding too far below this year's target for about 7 per cent.

The pace of growth in the services sector quickened to 8.4 per cent in the third quarter, while so-called secondary industry - which includes manufacturing - weakened to a 6 per cent expansion.

"It's what we call the two-speed economy," said Mr Zhu Haibin, chief China economist at JPMorgan Chase & Co in Hong Kong. "The manufacturing slowdown is the bigger problem for the Chinese economy in the near term."

Industrial output in September rose 5.7 per cent from a year earlier, compared with economists' median estimate of 6 per cent. Retail sales increased 10.9 per cent, versus a 10.8 per cent gain forecast for the month.

Fixed-asset investment climbed 10.3 per cent in the first nine months from the same period last year, compared to a median projection of a 10.8 per cent increase. That's the slowest pace of gains since 2000.

The slower growth of both industrial production and fixed- asset investment prompted some economists to question the reliability of the GDP data.

"We don't have total confidence in the numbers, and we are surprised by the acceleration in services output given the collapse in the equity market," Bloomberg economists Tom Orlik and Fielding Chen wrote in a note. "However, tax revenue - difficult to fake - is up 5.2 per cent year on year in the eight months to August and the gap with nominal GDP growth is narrowing."

Bloomberg's monthly GDP tracker slowed to 6.55 per cent in September from 6.64 in the prior month.

Reflecting the slowdown in the nation's old growth drivers, power consumption declined 0.2 per cent from a year earlier in September. A slowdown in property investment and excess industrial capacity have weighed on industries from steel to cement, leaving the economy on track for its slowest full-year expansion in 25 years.

China affects the world more than ever, with Federal Reserve chair Janet Yellen in September citing concern about China's economy among reasons for holding off from raising interest rates. A record stretch of deflation at the factory level in China is also helping depress prices for manufactured goods globally.

While avoiding the kind of all-out stimulus deployed after the global financial crisis, policymakers have deployed a variety of tools to cushion the slowdown. The People's Bank of China has cut interest rates to record lows and reduced banks' reserve requirement ratios, the Finance Ministry has relaxed rules for the local authorities to borrow, and the top economic planning body has stepped up project approvals.

"Between infrastructure investment spending and consumers, the economy is still powering along pretty well," said Mr Tim Condon, head of Asian research at ING Groep NV in Singapore. The GDP result "has to be a vote of confidence that the stimulus is doing something".