China's economy expands steadily in 3Q

GDP grew 6.7% year-on-year.

China's economy grew as expected in the three months ending September.

China released its 3Q16 GDP report on Wed morning, with headline at 6.7%y/y, the same pace as in 1Q and 2Q of this year. The outcome is right in line Bloomberg poll forecast.

UOB notes that while this is the slowest pace of expansion in more than 7 years, it remains within official growth target of 6.5-7.0% range for the 13th 5-year plan period (2016-2020).

 On a sequential basis, growth momentum remained respectable at 1.8%q/q from 1.9%q/q in 2Q16 (data revised up from 1.8% reported previously) and well above the trough of 1.2% in 1Q16.

In terms of sectoral performances, tertiary (services) again came up tops, with 7.6%y/y gain (7.5% in 2Q16), ahead of the secondary (manufacturing related) sector’s 6.1% (2Q16: 6.3%).

Moving forward, UOB remains positive on China’s growth outlook into 4Q16 and 2017, as the momentum in tertiary (services) sector should continue to lead and buffer any shortfall that might come from manufacturing sector.

"In addition, credit creation remains on track that should provide support for growth in the quarters ahead." it said in a report.

Here's more from UOB:

Credit creation remains on track to meet official target of 13% rise in aggregate financing (i.e. total social financing) in 2016. Year to date, aggregate financing has increased by RMB13.5tn (to Sep 2016), which leaves about RMB4.5tn for 4Q16 if the full year projection of +RMB18tn is to be achieved.

The other question is obviously for how long such pace of increase in credit can be sustained with the focus now debt and leverage in the Chinese system. As China continues to transform and reform and at the same time urbanization activities set to increase further, it is likely that such pace of credit creation is likely to remain for now.

Looking deeper into the data, new loans increase in Sep saw a faster than expected rise at RMB1.22tn in Sep, ahead of expectation of RMB1tn gain and the rise of RMB0.95tn in Aug. As loans form the bulk of aggregate financing, which rose a correspondingly fast pace as well in Sep, with a gain of RMB1.72tn from RMB1.47tn in Aug, and well above RMB1.39tn expectation. These figures again rekindle worries that China is going on a debt binge. However, there is a discernable shift in credit demand since 2015 to households, away from corporates. This mirror pattern is a reflection  of the shift towards a consumption-based economy, as China transforms and restructures. Again, a poor handling of this shift could bury the seed for the next debt worry in China in the years down the road.

All in with the underlying momentum and policy support, we do not expect China’s full year growth in 2016 to deviate significantly from our forecast of 6.7%, and this means that 4Q GDP growth is likely to come in at similar pace of 6.7%. Into 2017, we expect the pace of expansion to decelerate somewhat towards 6.6% with deleveraging the main risk factor. There remain significant challenges for China such as high private sector debt and leverage, surge in property prices, excess industrial capacity, and capital outflows, but we believe these are manageable.