Chinese economic growth slows in Q3 to lowest since 2009, growth likely to decelerate further in Q4

The Chinese economy is expanding at the most decelerating rate since 2009 and might face more headwinds as the trade war with the U.S. escalates. The real GDP growth slowed to 6.5 percent in the third quarter, the lowest since the first quarter of 2009. This is below consensus expectations of 6.6 percent. Aggregate growth for the initial three quarters came in at 6.7 percent.

“We expect moment to take another dive in Q4, as the trade tensions show no signs of abating. Thus, the government likely needs to continue stimulating domestic demand to deliver the 6.5 percent growth target for this year”, noted Nordea Bank in a research report.

The CNY and CNH were slightly moved after the GDP data release and continued to trade at the softest level against the USD since early 2017.

The first and most visible pain from the trade war is on the export sector that has already recorded declining sentiment. So far, the overall strong growth around 10 percent was underpinned by exporters frontrunning the tariffs, that is, to export before the tariffs hit. This shows why exports to the U.S. has continued to keep a solid growth rate. However, that is not sustainable. Chinese exports are likely to slow down in the months ahead before contracting next year, when the latest tranche of U.S. tariffs sees a rate rise to 25 percent, stated Nordea Bank.

External headwinds are expected to spill over to suppress domestic manufacturing activity. Industrial production rose 5.8 percent year-on-year in September. This is the most decelerating rate seen since February 2016, before the synchronised global rebound began. Decelerating manufacturing growth is in line with a fall in both PMI indices.

Meanwhile, there is evidence that the government is attempting to ease the negative impacts from the trade war by boosting domestic demand. Investment growth has accelerated a bit, mainly due to solid growth in manufacturing and real estate investment. In all, investment appetite will probably stay favourable and infrastructure investment is likely to recover as credit conditions improve. Bank loans, as well as local government bond issuances have accelerated in September.

Furthermore, the housing market remains in tailwinds. Housing prices are increasing by over 10 percent year-on-year and sales are rising at around 5 percent. This has stimulated land sales and construction starts. Both are important to keep a stable momentum in domestic demand.

At 11:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was bearish at -80.1909, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 53.9653. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex