Why China shouldn't be too happy yet with recent economic growth rebound

Three rising concerns revealed.

According to Morgan Stanley, macro data in China indicates a further rebound in growth since July. Yet there are at least three important questions for close China watchers to answer before shifting focus to the reform roadmap from the Third Plenary of the 18th CPC.

Here's more:

1) Is this rebound sustainable? We do not hold high expectation that this growth rebound will last long, as the favorable low base from last year will dissipate soon.

In addition, headwinds will likely strengthen in early 2014, as: 1) the temporary boost from restocking demand and business confidence will likely taper off; 2) the hurdle for policy easing is harder to reach after the recent rebound; and 3) the potential weakening in EM demand may become a drag, despite a mild DM recovery.

2) Has deleveraging started or reversed? Deleveraging in the strict sense has yet to begin, but the good news is that a deleveraging process with“Chinese characteristics” is undergoing – the Chinese government has chosen to support/restrain development of certain sectors via fiscal and monetary policies.

3) Is China rebalancing towards a consumption-driven growth model? Such a partial and gradual deleveraging process, if continued, suggests a lower probability of economic rebalancing in the near future.

We are not necessarily too worried, because China does have to invest more (in proper areas) before consumers can ramp up their expenditure.

In addition, we reiterate our view that statistical deficiencies probably exaggerated the magnitude of imbalance in the underlying economic structure. In view of the potential headwinds on growth and challenges in implementing ‘acupuncture-style’ reforms, we believe there is no alternative to profoundmarket- oriented reforms.

But more heavy lifting is left for the fiscal, financial, land, foreign exchange, energy and other reforms to be announced soon. We will address the details of our thinking on what to do and how to do it in our next report.