• The Chinese economy grew at a 6.5 per cent annual rate in the September quarter (forecast: +6.6 per cent), down from 6.7 per cent in the June quarter – the slowest annual growth rate in 9½ years.
• Chinese retail sales rose at a 9.2 per cent annual rate in the year to September, (forecast: +9.0 per cent), up from 9.0 per cent in August – the fastest annual growth rate in 15 months. Real retail sales rose at a 6.4 per cent annual rate in the year to September, down from 6.6 per cent in August.
• Chinese industrial production rose at a 5.8 per cent annual rate in September, below the forecast average (+6.0 per cent). Production had risen by 6.1 per cent in the year to August.
• Chinese urban investment rose by 5.4 per cent in the nine months to September on a year earlier (forecast: +5.3 per cent), up from 5.3 per cent growth in the eight months to August.
• The unemployment rate fell to 4.9 per cent in September, down from 5.0 per cent in August.

The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

• China posted its slowest annual economic growth rate in 9½ years in the September quarter. But it wasn’t all ‘bad’ news. A bit of retail therapy during the Mid-Autumn Festival period lifted the spirits of Chinese consumers. Spending on telecommunications rose (perhaps due to the launch of the Apple iPhone XS), lifting retail spending to the best annual growth rate in 15 months. However, the downturn in motor vehicles sales was expected.
• The Chinese government is ‘caught between a rock and a hard place’ at the moment. On one hand, reigning-in China’s huge debt load through de-leveraging is a priority. But on the other hand, economic activity is slowing as the economy matures and pivots more inwardly towards the consumer.
• And the external threat of US tariffs due to China’s significant trade surplus represents a challenge to export-orientated sectors, depressing their earnings and hiring intentions.
• Backed into a corner, Chinese policymakers have been pro-active. Fiscal initiatives have been announced focusing on tax cuts, bond issuance for infrastructure spending and social housing investment.
• And People’s Bank of China Governor Yi Gang recently reiterated that interest rates could be adjusted and banks’ Reserve Requirement Ratio (‘RRR’) lowered further due to significant downside risks from the Sino-US trade dispute.
• China is Australia’s largest trading partner, so economic activity in the world’s second largest economy is important. While Australia could get caught in the crosshairs of the escalating US-Sino trade war, at this stage China’s insatiable demand for our iron ore, coal, agricultural and services (education and tourism) exports, remains firm. In fact, Australia has recorded trade surpluses in 13 of the past 15 months to August, supported by record-high annual exports to China totalling $108.18 billion. And we could benefit further if Chinese travellers and importers boycott US goods and services, such as wine, travel and international study.
• And while Chinese economic growth has slowed, China’s share of global GDP growth has been steadily building over time, meaning that lower growth still provides the same overall contribution to global growth.

What do the figures show?

Chinese Economy

• The Chinese economy grew at a 6.5 per cent annual rate in the September quarter (forecast: +6.6 per cent), down from 6.7 per cent in the June quarter. It was the slowest annual growth rate in 9½ years.
• GDP grew by 1.6 per cent in the September quarter (forecast: +1.6 per cent) after lifting 1.8 per cent in the June quarter.
• Chinese retail sales rose at a 9.2 per cent annual rate in the year to September, (forecast: +9.0 per cent), up from 9.0 per cent in August. Real retail sales rose at a 6.4 per cent annual rate in the year to September, down from 6.6 per cent in August.
• Annual retail growth rates were: garments (up 9.0 per cent); cosmetics (up 7.7 per cent); jewellery (up 11.6 per cent); personal care (up 17.4 per cent); home appliances (up 5.7 per cent); office supplies (up 4.9 per cent); furniture (up 9.9 per cent); telecommunications (up 16.9 per cent); oil products (up 19.2 per cent); automobiles (down 7.1 per cent); building materials (up 8.4 per cent).
• Chinese industrial production rose at a 5.8 per cent annual rate in September, below the forecast average (+6.0 per cent). Production had risen by 6.1 per cent in the year to August.
• Across industries, annual growth rates were: textiles (up 0.8 per cent); chemicals (up 5.0 per cent); non-metal minerals (up 5.2 per cent); ferrous metals (up 10.1 per cent); general equipment (up 6.1 per cent); transport equipment (down 2.4 per cent); machinery (up 5.2 per cent); communications (up 12.6 per cent); power equipment (up 11.0 per cent).
• Across products, annual growth rates were: electric power (up 4.6 per cent); steel products (up 9.8 per cent); cement (up 5.0 per cent); crude oil runs (up 4.9 per cent); cast iron (up 4.4 per cent); steel (up 7.5 per cent); motor vehicles (down 10.6 per cent); cars (down 8.6 per cent); coal (up 5.2 per cent); natural gas (up 8.5 per cent); crude oil (down 2.4 per cent); coking coal (down 0.1 per cent).
• Chinese urban investment rose by 5.4 per cent in the nine months to September on a year earlier (forecast: +5.3 per cent), up from 5.3 per cent growth in the eight months to August.
• Across industries, year-to-date growth rates were: state firms (up 1.2 per cent); real estate (up 9.9 per cent); primary industry (up 11.7 per cent); secondary industry (up 5.2 per cent); tertiary industry (up 5.3 per cent); electricity (down 10.7 per cent); railway transport (down 10.5 per cent); domestic investment (up 5.8 per cent); Hong Kong/Taiwan investment (down 6.0 per cent); foreign investment (up 4.7 per cent).
• Chinese property investment rose by 9.9 per cent in the nine months to September on a year earlier, down from 10.1 per cent in the eight months to August.
• China’s unemployment rate fell to 4.9 per cent in September, down from 5.0 per cent in August.

What is the importance of the economic data?

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• Commonwealth Bank economists had tipped a slowing in China’s annual economic growth rate (GDP) to 6.5 per cent, given the deceleration in net exports and investment during the September quarter.
• China’s policymakers have some work to do in the fourth quarter if they want to meet their own annual growth target of 6.5 per cent by year-end. A plethora of policies have been announced, which will likely spur construction activity in the months ahead. For example, special bonds for infrastructure investment, tax cuts and spending on social housing redevelopments (US$143.63 billion so far this year, according to Reuters) are yet to fully feed through to the data.
• Investors should watch for more initiatives from Chinese authorities to stimulate activity – known as the “Beijing put”. A more “proactive” fiscal policy is favoured, as the Chinese authorities attempt to strike a balance between easing and tightening and keeping liquidity “reasonable and sufficient.” And building inflationary pressures are worth watching, particularly given the swine flu outbreak, impacting pork prices.
• This may have implications for the Chinese equities and currency markets. Both are already in sharp focus with the Shanghai Shenzhen CSI 300 Index already down by 24.1 per cent so far this year – near four-year lows. And the Yuan is currently trading at its lowest level since January 2017. The government has a delicate balancing act maintaining calm as risks mount. That said, consumers appear to be ‘weathering the storm’ resolutely still buying goods, despite lifting inflation, perhaps boosted by falling urban unemployment.
• Commonwealth Bank economists expect the gradual slowdown to continue into 2019 with annual growth of 6.3 per cent forecast. But the IMF has warned that the escalating trade war could shave off 1.6 percentage points from growth over the next two years.
• CommSec expects Australian interest rates to be unchanged until late 2019.

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