China's third-quarter GDP reading is consistent with real GDP growth slowing to the 7-8 percent range that Fitch Ratings expects over 2012-2014. While growth is lower than the 9-10 percent range from 2008 to 2011, the current slowdown is much less abrupt than during the global financial crisis four years ago, and we still think China's economy will avoid a hard landing.

Chinese GDP grew by 7.4 percent in the quarter of this year from a year earlier, according to the National Bureau of Statistics, down from 7.6 percent in the second quarter. More positively, September's retail sales saw the biggest year-on-year increase since March (although this may have been affected by higher sales during a holiday period), and industrial production was up 9.2 percent year on year.

A slowdown in growth is also evident from other data this year - such as slowing electricity production growth in the first half, and negative steel output in August. In Fitch's September Global Economic Outlook, we trimmed our expectations for full-year China's GDP growth for 2012 to 7.8 percent from 8 percent, following the second-quarter reading.

China has scope for policy flexibility: we think fiscal stimulus will be modest while the labor market remains resilient, and the authorities are mindful of the risks of rapid credit growth - such as weakening the banking system. Nevertheless, the stimulus could still be sufficient to help raise growth toward 8 percent by year-end and support a rate of about 8.2 percent in 2013.

Indeed, in early September China's central planning body announced a stimulus program involving new and existing agriculture, energy and transport projects, with an emphasis on railway infrastructure. However, these new measures may result in poor economic returns. The railways are one of the most unproductive sectors in China, and returns on infrastructure projects take time to be realized.

Over the longer term, China needs to further re-balance its economy towards consumption from investment - in order to reduce economic instability and imbalances in the economy, while maintaining growth and limiting expectations for inflation. This remains a major task, as gross fixed-capital formation contributed a record 46.2 percent of GDP in 2011. A pattern of stronger consumption and weaker heavy industrial output fits the picture of a slowly rebalancing economy, although it is too early to conclude that this process will proceed quickly or smoothly.

Fitch's Long-Term Foreign-Currency Issuer Default Rating for China is "A+" with a Stable Outlook. The "AA-" Local-Currency IDR has a Negative Outlook. A sharper-than-expected and prolonged economic slowdown is one potential trigger for a local-currency downgrade.

The article was a post on the Fitch Wire credit market commentary page. All opinions expressed are those of Fitch Ratings.

Go to Forum >>0 Comment(s)