China September data to show steady growth ahead of key Communist Party congress

Chinese data in coming weeks is expected to deliver exactly what its leaders want to hear ahead of a highly sensitive Communist Party Congress – the country’s economic growth remains robust and resilient even as they work to get debt risks under control.

The twice-a-decade party congress that kicks off on Oct. 18 is expected to see President Xi Jinping strengthen his grip in a leadership reshuffle, and will set the political and economic policy tone for China for the next five years.

So far this year, the world’s second-biggest economy has held up better than expected despite views that a clampdown on riskier types of financing and a flurry of measures to cool heated housing prices will drag on activity.

But many economists still contend growth will fade in coming months under the weight of higher borrowing costs, property curbs and the government-mandated shutdown of some highly polluting factories to reduce winter air pollution.

The boost from heavy government stimulus — Beijing’s infrastructure spending spree has helped fuel a year-long construction boom — will also begin to ebb, skeptics argue.

Still, economists polled by Reuters expect China’s economy is heading into the fourth quarter with plenty of momentum.

Growth in industrial output is expected to accelerate to 6.2 percent from a year earlier, from August’s 6 percent, according to a Reuters poll of 24 economists.

Steel mills are believed to be running at full steam to cash in on strong demand and prices, and to build up inventories in case they are ordered to reduce output over winter.

Fixed-asset investment is predicted to have increased 7.7 percent in the first three quarters on-year, only slightly softer than a 7.8 percent rise in January-August.

Retail sales growth is seen edging up to 10.2 percent.

China’s trade performance is also expected to improve after softer-than-expected readings in August raised questions about the sustainability of its domestic and export demand.

Exports are expected to have risen 8.8 percent on-year, while imports may have jumped 13.5 percent, producing a trade surplus of $39.5 billion. A pullback in the strong yuan currency in recent weeks may be giving exporters some relief.

GROWTH VERSUS DEBT

While there is little worry of an economic hard landing, debt risks appear to be back on the radar as Beijing continues to pump out more credit to keep activity humming.

S&P Global Ratings downgraded the country’s credit rating last month, saying China’s attempts to reduce risks from its rapid build-up in debt are not working as quickly as expected and credit growth is still too fast.

China in July set up a new financial stability committee under the State Council to coordinate financial oversight, with the central bank taking on a bigger role.

The People’s Bank of China early this year included off-balance sheet wealth management products in its Macro Prudential Assessment (MPA) for the first time to give authorities a better sense of potential risks to the financial system.

September’s loan data will be closely watched for signs of where policy may be going next, as banks have shifted more credit back onto their books in response to the clampdown on shadow financing.

Chinese banks are seen extending 1.1 trillion yuan ($165.33 billion) in new loans in September, up from 1.09 trillion yuan in August.

Credit growth could get an extra boost in coming months after the PBOC on Saturday cut the amount of cash that some banks must hold as reserves for the first time since February 2016. The move is linked with a policy to encourage more lending to struggling smaller firms and the private sector.

It could trigger a flurry of lending as banks look to qualify for lower reserve requirement ratios (RRR) which go into effect in 2018, though some analysts believe the impact on the economy may be tempered if Beijing continues its campaign to rein in debt risks at the same time.

“We believe the RRR cut may not lead to a quick pickup in total credit growth if policy makers continue to strictly enforce the macroprudential assessment (MPA) framework and the new rules related to the financial system cleanup,” Morgan Stanley wrote in a note to clients.

Inflation data may also offer clues on firms’ debt-servicing capability.

The producer price index (PPI) is tipped to have risen 6.3 percent in September on-year, steady from August.

Profits at industrial companies rose the most in four years in August as commodities prices surged, though a Reuters analysis showed few listed firms have used the windfall this year to retire their debt.

Again, analysts predict producer prices will start to soften in the fourth quarter due to a high base of comparison last year and as overall demand moderates along with economic growth.

The consumer price index (CPI) meanwhile is seen up 1.6 percent on-year in September, versus 1.8 percent in August and well within Beijing’s 2017 target of 3 percent.

Besides the campaign to reduce high levels of debt across the economy, authorities have also been trying to reduce the risk from capital flight by stabilizing the yuan currency.

China’s foreign exchange reserves are expected to have risen for an eighth month to $3.1 trillion in September, as capital curbs and a weakening dollar helped staunch fund outflows.

China is due to announce foreign exchange reserves data on Oct. 7, followed by trade and inflation data on Oct. 13 and Oct. 16 respectively, while loan and money data is expected anytime from Oct. 10 to Oct. 15.

The data will lead up to third quarter gross domestic product (GDP) on Oct. 19. China’s economy grew 6.9 percent in the first half, and is expected to easily meet or beat the government’s full-year target of around 6.5 percent.
Source: Reuters (Reporting by Yawen Chen and Ryan Woo; Polling by Shaloo Shrivastava; Editing by Kim Coghill)

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