Solid momentum pushes us to raise our growth forecast for this year.
Chinese GDP growth accelerated in Q3 to 4.9% in real terms year-over-year (y-o-y), up from 3.2% in the previous quarter, leading us to revise up our 2020 Chinese GDP forecast to 2.1% from 1.8% previously.
Consistent with the typical pattern of economic recovery during the pandemic, the secondary sector (mainly manufacturing) expanded the most in Q3, by 6.0% y-o-y. The strong growth in manufacturing likely was supported by robust exports. In the early stage of the rebound, demand for Chinese goods was concentrated on covid-related items such as personal protective gear and work-from-home equipment. In recent months, however, demand has broadened. For example, Chinese exports of furniture rose by 30.6% y-o-y in September.
Domestically, fixed-asset investment (FAI) has been steadily improving, supported by government-sponsored infrastructure investment, while there has been a particularly strong rebound in property investment.
Consumption continued to recover in September, with retail sales rising by 3.3% y-o-y, compared to growth of 0.5% in August. Auto sales extended the strong growth of the previous month, rising by 7.5% y-o-y in September. The rebound in Chinese consumption is also reflected in the surge in automobile imports in recent months.
All in all, by the end of Q3, the Chinese economy was 0.7% bigger y-o-y than at the start of the year, meaning it has recovered all the losses caused by the pandemic early this year. The recovery in services still lags the rest of the economy. For example, in September the number of air travel passengers was still 12.5% below the level in the same month in 2019, and movie box revenues, after a sharp rebound since mid-August, have dipped back into negative growth in recent weeks.
Nevertheless, we remain optimistic about China’s growth outlook over the next 12-18 months. The Chinese government has moved quickly to control any local resurgence of coronavirus infections. As China-developed vaccines are close to being deployed to a big part of the population, the threat to the Chinese economy from the virus itself will likely fade over time. At the same time, the policy environment remains fairly supportive. Although the People’s Bank of China has refrained from additional rate cuts since late April, credit growth remains strong. Total social financing grew by 36.4% y-o-y in September on a rolling 12-month basis and long-term corporate credit growth remained elevated. We expect Chinese growth to stay robust in Q4.