China economy in 'cruising speed'

Today (19 October) it was reported that China’s gross domestic product grew at an annual rate of 6.7 per cent in the third quarter, matching economists’ estimates.

It was the third quarter in a row that the economy grew at that pace.

Mr Lueth said this is based on significant stimulus and comes at the risk of financial crisis or Japanese-style stagnation over the medium.

Mr Lueth said nominal GDP surged to 9 per cent as deflationary pressures are lessening. This is particularly apparent in the industrial sector, Mr Leuth said, which is rebounding on the back of a buoyant property market.

"Momentum remained strong in September, with property sales up 35 per cent year-on-year and investment in recovery mode.

"The firm data come on the heels of strong credit data for September, suggesting growth trumps rebalancing ahead of October 2017, when five out of seven members of the politburo standing committee will change."

Mr Lueth said risks of a painful property bus are limited at this stage, and price declines will have little impact on consumption as household debt, whilst rising, is still moderate.

"The main conduit of a possible property bust, construction activity, is still quite lacklustre at this point in the cycle.

"Similarly, we don’t see risks of a financial crisis anytime soon. The banking system is state-owned and flush with cash given one of the highest saving rates in the world.

We don’t see risks of a financial crisis anytime soon. The banking system is state-owned and flush with cash.Erik Lueth

"This does not, however, preclude a crises or Japanese-style stagnation a few years from now, if the leadership continues to prioritises short-term growth over structural reform and better resource allocation."

For Craig Botham, emerging markets economist at Schroders, said a breakdown of the data reveals an acceleration in primary industry and a smaller increase in the tertiary, or services, sector. Manufacturing managed stable growth.

"Overall, this is not a promising sign for the rebalancing story and suggests growth is being maintained at the cost of longer term sustainability.

"A look at the higher frequency data helps to illustrate this point. Over the quarter, credit growth barely slowed despite a dip in corporate lending, as mortgages and government municipal bond issuance helped to fill the void."

He said it is now possible to see a crackdown on the property market both through macroprudential and, reportedly, the credit channels as the central bank leans on lenders.

"In tandem, the ability of local governments to support credit growth through municipal bond issuance is waning. A quota ceiling of RMB 6.2trn (£0.75trn) for the year implies a reduction in the average issuance for the final three months of the year, from RMB 600bn (£72.3bn) per month to RMB 400bn (£48.2bn)."

Mr Botham said a softer investment outlook as 2016 closes seems certain when you consider that even with this support governments have been unable to do more than halt the decline of investment.

"Part of the problem has been, and remains, weak private sector investment. This growth has taken another step down in the third quarter. A number of challenges face the private sector: overcapacity, lower profits and a higher cost of credit."

He added the return of producer price inflation to positive territory may help with profitability but the other problems do not look likely to go away.

"The central bank seems reluctant to ease in the context of a property market bubble and building currency depreciation pressure, and state-owned enterprises continue to weigh on capacity.

"In property, which has driven much of the growth this year, September sales continued to surge. Yet despite the booming sales environment, new starts decelerated sharply. That this came even before the majority of restrictions were introduced suggests a further slowdown is likely, which will weigh on fixed asset investment.

"Growth should largely meet its target this year and in 2017, but the longer term picture is deteriorating."

ruth.gillbe@ft.com