China’s GDP slumps by 0.2% in September

There’s a growing pressure to stand by structural reforms.

The country’s weakening economic momentum should be welcomed if the government wants to pursue its structural reforms until the very end.

According to a report by DBS, China’s GDP growth slowed to 7.3% YoY in the third quarter, down from 7.5% in the previous quarter. Growth was 1.9% on a seasonally-adjusted QoQ basis, a tad lower than 2.0% in 2Q. A batch of monthly data was also released yesterday. Industrial production and retail sales grew 8.0% and 11.6% in September respectively, c, compared to 6.9% and 11.9% in August respectively. Meanwhile, fixed-asset investment grew a meager 16.1% YTD.

DBS adds that weakening economic momentum is testing the leadership’s resolve for structural reforms. In particular, September’s CPI, released last week, rose only 1.6% and was the lowest since January 2010. This was primarily due to declining food inflation and commodity prices.

While low inflation gives policymakers leeway to loosen monetary policy, broad-based loosening is not the preferred response. CPI is only one of many factors to consider. China has managed to grow 7.4% YTD without broad-based monetary loosening. 

Here’s more from DBS:

Premier Li Keqiang commented that quality growth, even if it is slightly lower than 7.5%, would be acceptable. As such, there is no justification to make a policy U-turn now.

That said, Beijing is aware of the downside risks. PBOC lowered the repo rate twice in the recent month and mobilized standing lending facilities (SLF) in September. Such flexible liquidity measures would be employed more frequently in the future, and preferred over direct adjustments to benchmark lending rates and reserve requirement ratios.