China delivers global economy into blissful Goldilocks territory

Consumption, which in Chinese statistics includes some govt spending, contributed 64.5% of growth in the 1st 3 quarters

By BLOOMBERG

BEIJING • China’s robust expansion is boosting a global economy that’s already racking up its best performance in a decade.

China yesterday announced that the world’s second-biggest economy expanded by 6.8% in the third quarter (3Q), following on from weekend musings from central bank governor Zhou Xiaochuan of a 7% pace for the second half (2H). And in a sign the consensus view of a sharp slowdown next year is fading, Goldman Sachs economists raised their forecast for 2018’s expansion to 6.5%.

Evidence of the upswing was on display in Asia yesterday: South Korea’s central bank lifted its economic growth estimate for 2017, Japanese exports grew by double digits for a third straight month in September and Australian unemployment unexpectedly dropped. The International Monetary Fund (IMF) last week upgraded its growth outlook for the US, the euro area, Japan and China, and said the global economy’s performing at its best pace in the last ten years.

“China’s 3Q economic data are another reflection of a global Goldilocks economy in 2017,” said William Adams, senior international economist at PNC Financial Services Group in Pittsburgh who previously worked for the Conference Board in Beijing. “This virtuous cycle literally touches all corners of the world, from China, to Canada and Australia.”

The IMF projected the global economy will grow 3.6% this year and 3.7% next, in both cases an increase of 0.1 percentage point from its previous estimate, with Asia contributing 63.3% of the expansion.

The revival of import demand in China has been a source of strength across Asia and there’s been a strong revival of Asian exports to the US and Europe, making the global upswing “a highly synchronised affair”, said Klaus Baader, chief Asia-Pacific economist at Société Générale SA.

Zhou said the driving force behind China’s 2H acceleration would mainly be household consumption. That was reflected in data released yesterday with retail sales accelerating to 10.3% in September from a year earlier. Consumption, which in Chinese statistics includes some government spending, contributed 64.5% of growth in the first three quarters of 2017, 2.8 percentage point higher than the same period of 2016.

“The boost China is providing to the global economy is changing in nature,” said Baader. “It is likely to be less skewed toward commodity-producing countries in future, and more towards countries that provide services to Chinese households, in particular tourism services.”

China’s increasing impact on the world, as well as its grandiose ambitions, were highlighted by President Xi Jinping on Wednesday, when he addressed Communist Party leaders gathering in Beijing this week to map policy for the next five years. He said China is contributing about 30% of global growth and outlined a three-decade road map toward great power status, saying by 2050 the country would be a global leader in innovation, influence and military might.

China’s latest data all but guarantees it will contribute around 35% of world growth this year, said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney.

While China’s growth jolt for the world seems secure this year, headwinds loom. The world needs to push through reforms, defuse political tensions and overcome disruptions from the impact of technology and other changes, IMF MD Christine Lagarde said last week. Risks include volatile capital markets and tighter financial conditions with spillover consequences around the world, she said.

While central bank governor Zhou anticipates a possible 7% expansion in the 2H of 2017, he also warned about the build-up of leverage, saying corporate debt is too high and that there’s no clear fiscal mechanism to restrain local governments. The durability of China’s expansion will be tested as leaders press on with their plans to tackle swelling debt, cut excess capacity and clean up pollution.

China’s potential downside impact on the global economy was highlighted in 2015, when it roiled financial markets enough to nudge the US Federal Reserve (Fed) away from raising interest rates. The Fed said then that the US economy and inflation may be restrained by “recent global economic and financial developments”, and Fed chair Janet Yellen later said the financial turmoil reflected investor concerns about risks to Chinese growth.

Still, for now China’s enduring economic growth is a welcome tailwind for Communist Party leaders gathering in Beijing. Xi told delegates that China is transitioning from a rapid growth model to one more focused on high-quality development.

“China is hugely important for the world economy,” said Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc in Singapore. “There is a lot at stake for the whole world for China to successfully transition to a new growth model driven more by productivity, consumption, services and private enterprises.”