Most agree that the higher-than-forecasted 7.8% GDP figure recorded for China’s economy in the third quarter is an aberration and unlikely to be sustained going forward. All the same, though, some investors are still bullish on the world’s second largest economy as it heads closer to 2014 and continues on its trajectory toward becoming an economy driven more by domestic consumption and less by exports.
“Some of the Q3 growth can be attributed to the temporary stimulus created by the central government, and my feeling is that growth will slip back to 7.3% for 2014, slightly below the 7.5% figure China will post for 2013,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo. “But still, that’s quite a clip and different sectors of the Chinese economy have been posting figures that clearly support the rebalancing of the economy toward domestic consumption.”
Retail sales, for example, rose by 13% in the third quarter, Jacobsen said, while industrial sales increased by 10%. “These are the kinds of numbers we’ve been seeing on a consistent basis and that we will continue to see,” he said.
The third quarter GDP figure shows a bit more momentum in China’s economy than was otherwise expected, albeit that the quarterly numbers are drawn from a very narrow sector base compared to other countries such as the U.S., where 200 industrial sectors are used as a sample, according to Edmund Harriss, investment director at Guinness Atkinson Funds in London.
Still, “I would agree that momentum has returned and this is good,” Harriss said. “Now, it’s also clear to me that the Chinese government wants to push forward with its reform program, which will be announced in November, and the overarching goal is still to reallocate capital to consumer and service-oriented areas.”
That shift, of course, has been going on for a long time and it continues to proceed far more slowly than most would like it to, evidenced by the fact that consumption made up less than 50% of growth in the first three quarters of this year.
However, China is a massive country and according to Jacobsen, “it’s still recovering from the [Mao Tse Tung] years.” The government has been spending a great deal on infrastructure (overall investment in the sector was close to 30% for the first three quarters of the year), which means that support for the sectors that would drive the consumption economy has taken a backseat, but Jacobsen said that this kind of “catch up investing” in infrastructure, particularly in the housing sector, is necessary for China to move forward and will lay a better foundation for the consumption economy.