September Economic Data Exceeds Expectations

Economic data released over the weekend indicated that China’s economy may have begun to stabilize in September, as both the trade surplus and money supply grew more than estimated and inflation fell to its slowest pace in two years. The Wall Street Journal, however, reports that analysts welcomed the news but refrained from signaling that the world’s second largest economy had bottomed out:

“The trade data is a positive sign for the Chinese economy,” said Citigroup C +5.50%economist Ding Shuang. “But it remains to be seen whether import and export growth can remain at these levels,” he added, noting that unfavorable economic fundamentals in the U.S. and the European Union—China’s two big trade partners—raise uncertainties.

The monthly results come as economists and investors look for a bottom for the slowdown in China’s economic growth. The nation’s growth rate likely slowed to 7.4% in the third quarter to its lowest level since the first quarter of 2009, according to economists surveyed by the Journal. That would be below the government’s full-year GDP target of 7.5%. The National Bureau of Statistics is scheduled to issue GDP data on Thursday. “We expect the data to show that demand remained weak, destocking continued, and recovery has yet to happen,” UBS UBSN.VX +1.44%economists said in a note. “Continued destocking has likely delayed economic recovery,” they added.

The news buoyed global markets on Monday, according to The Associated Press, creating positive momentum at the start of a week that should also see more progress on the economic fates of Greece and Spain. Bloomberg reports that the price of gold also declined to its lowest level in more than two weeks, reflecting a belief that China would not need to implement additional stimulus measures. Reuters adds that the low inflation, combined with signs that lending may be on the upswing, may take some pressure off policymakers to act ahead of the 18th Party Congress.

But has China really turned a corner? MarketWatch’s Craig Stephens dives further into the latest data releases, predicting that this week’s announcement of China’s third quarter GDP growth figures should “show a further slowdown”, and also noting that economists have been burned already this year for prematurely calling the bottom of China’s economic downturn:

Still, it will take more than one month’s export data to restore confidence in China’s growth story. The backdrop of a weak global economy also makes it harder for China to continue to crank up exports.

There are also some one-off influences in September’s trade bounce to consider. Firstly, there was likely some front-loading of shipments ahead of the eight-day “Golden Week” holiday in the first week of October.

And let’s not forget the launch of Apple’s iPhone 5. This is also cited for stronger monthly figures, as mainland Chinese assembly factories ramped up overtime.

On China’s domestic economy, the trade figures offer less reassurance. Imports in September edged up 2.6% — better than the contraction in August, but still suggesting a spluttering economy.

Meanwhile, Chinese banks are still failing to anchor the economy by turning on the lending taps.

Still, some see opportunity for the China to avoid a hard landing and enact the reforms necessary to achieve more sustainable growth levels. At the Chinese Finance Association’s annual conference in New York over the weekend,The Wall Street Journal’s Erin McCarthy reports that China’s economy faces a critical juncture:

“Last year, most economists in China feared complacency [with the state of the economy], but this year anxiety permeates,” said Jianfeng Yin, deputy director general of the Institute of Finance and Banking at the Chinese Academy of Social Sciences. “Today many people think the turning points are coming.”

Mr. Yin predicted that the share of China’s working-age population will start to decrease in 2015, marking a critical nexus. Many of these workers had gone into non-agricultural employment, helping to drive China’s industrial sectors. Meanwhile, another force dragging down China’s competitiveness globally is higher labor costs, placing more pressure on its economy.

In addition, Mr. Yin said he sees an investment turning point, with non-financial businesses and the government’s savings rates likely decreasing because of these rising wages and demographic shifts.

Within these challenges, however, Mr. Yin and other participants at the conference saw the opportunity to create more-sustainable growth, particularly through more investment and financial reforms.