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China's 3rd Quarter GDP 8.9% -- But is it Sustainable?

Posted by: Dexter Roberts on October 22, 2009

For those who believe China is an unstoppable economic machine, more evidence out today with third quarter growth clocking in at an impressive 8.9%, up from 7.9% in the second quarter. That’s seen as evidence that Beijing’s massive $586 billion fiscal stimulus and soaring loan growth—$1.27 trillion in new loans and up more than 150% this year—has shielded China from the worst effects of the global economic recession. Next up? Beijing will begin to wean itself off state support (a full 6.2% points of China 7.1% gdp growth in the first half still came from investment) and start relying more on longer term sustainable economic drivers like private consumption.

Already there are signs China is succeeding, the optimists say. As well as public investment—the majority of the 33.4% growth in fixed asset investment over the first nine months came from government stimulus spending—the Chinese economy is showing “a revival in private real estate investment and a resilient consumer sector,” writes Jing Ulrich, J.P. Morgan’s Hong Kong-based Managing Director & Chairman of China Equities & Commodities. “The most recent economic data suggests that China’s economic recovery is broadening,” she continues, pointing to a decline in unsold housing inventory.

A 15.1% rise in retail sales in the first three quarters too is seen as encouraging, as well as 9.3% growth in urban incomes and 8.5% in the countryside. China has begun “to implement its ‘exit strategy’, which is a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption,” writes CLSA Asia-Pacific Markets analyst Andy Rothman. .

At the same time, however, many are starting to question just how easy it will be for China to break its reliance on state spending to become a more sustainable and balanced economy. Beijing’s declared goal of course, is to build an economy driven more by innovative, private enterprises, one where the Chinese consumer much more supports growth rather than American and European consumers as before. But consumption has actually declined from 45% of gdp a decade ago to around 35% today. China’s record of creating truly innovative companies to date has been lackluster, and the vast majority of new lending (as before) is going to well-connected state companies rather than smaller, private ones.

Also worrying is growing overcapacity in the Chinese economy. On Monday, China’s National Development & Reform Commission warned that overcapacity is plaguing six industrial sectors including steel, cement, glass, chemicals, coal, poly-silicon production and wind power equipment. And while China says it is taking measures to deal with the glut—banks have been told to limit lending to these sectors—there are also growing signs that Beijing is becoming more protectionist, including by issuing “buy local” decrees for all government purchases.

Meanwhile, China’s National Bureau of Statistics is not calling the economic battle won yet: “The basis of the economic recovery still needs to be consolidated, and the insufficient external demand is still severe, with the arduous task of expanding domestic demand and adjusting the structures,” the NBS announced today. China needs to “maintain the consistency and stability of the macro-economic policies [and] … insist on the proactive fiscal policies and moderately lenient monetary policies,” it continued. Don’t expect an end to state spending yet.

Reader Comments


October 22, 2009 4:08 AM

The actual consumption as a percentage of GDP is far higher than what the official figures indicate, a situation that's going to be rectified, to an extent, by the publication soon of the results of the 2nd economic census. Any one who has lived in China for a couple of years know for sure that the service sector are teemed with enterprises (i.e. massage parlours, restaurants, hairsolons, KTV joints etc.) which trade on cash. These are far from adequately reflected in the calculation of the GDP figure. And contrary to what the western analysts believe, local governments and state/private enterprises tend to under-report incomes and earnings, for China's tax system is such that the amount of tax due is reveue based, i.e., the entity is taxed on its sales even if it makes a loss. Who in his right mind would contrive to inflate the sales numbers so that more taxes might be levied by the local and central government?


October 22, 2009 7:01 AM

those growth numbers are only filling the slack made by mao ze dong
two billion people should do much more than this
we will see growth numbers for a while
until the country reaches its normal activities level


October 22, 2009 8:08 AM

Is it sustainable? I do not know. But seems this question is quite sustainable.

hanyu choi

October 22, 2009 9:58 AM

To Jaderdavila: Present-day China has nothing to do with Mao ze-dong's idealogy. Where did you the 2 billion figure? I thought the population of China is 1.3 billion.


October 22, 2009 10:03 AM

To Dexter Julia Roberts, obviously, everything regarding China is questionable to you. Do you realize that you are not fit to be a reporter?


October 22, 2009 11:10 AM

Oh sure 8.9% is sustainable! As long as every eight years they get twice as much supply, twice as much oil, twice as many workers, twice as much space, and twice as many sales!! They may need to buy Russia in a decade or so but with all the money from us I'm sure they can afford it!


October 22, 2009 11:18 AM

The short answer is "no". Any amount of growth is only sustainable for a time. Growth and decline are the antithesis of sustainability. And this rate of growth is just plain reckless.

Xiang Yu

October 22, 2009 1:23 PM

Here we go again. Is it sustainable? Before the meltdown, the so called western "economists" said that China was overheating. Then came the meltdown, and suddenly those "experts" said that China was too slow. Now, we're back at the "overheating" theory.


October 22, 2009 2:09 PM

I agree with both XY and Jaderdavila. I go to China quite often on business, and I can see with my own eyes, regardless of what so-called analysts were/are predicting/guessing, Chinese consumption has gone up, while the world economy has tanked. While Chinese exports may have taken a big hit, it apparently didn't hit the consumers too badly. Shopping malls and street shops were full with people carrying bags of stuff, as opposed to window shopping which you see in shopping malls in America. Xy is correct that the actual percentage of consumption is much higher than the official statistics because a lot of income is unreported. (China's tax system needs major improvements.) While the percentage may have dropped (officially) from 45% to 35% in the last decade, as mentioned in this article, keep in mind the entire GDP has more than doubled. While I don't claim to know if and when China will overtake the US, it is clear that China will be growing at a rapid pace for a while.

gabe, san diego

October 22, 2009 4:15 PM

aaahhh, nooo?

only my humble MBA opinion.


October 22, 2009 6:15 PM

XY...I agree 100%.

Husin O'Bama

October 22, 2009 6:44 PM

US is putting more socialist policies while the CCP is dangling out more capitalism in the so-called Socialism with Chinese characteristics. Is it sustainable? Take your maths, 800 million peasants on 2000 USD per capital income still fighting everyday grind to improve their lives.

C. H. Ng

October 23, 2009 1:23 AM

Who care about whether it will be sustainable or not; least the Chinese in China. Right now nobody in his or her right frame of mind would want to see the bad economic scenario in their own country. Do you?
Anyway a strong economic growth in China (or any other country) no matter how brief or whatsoever, is good for many people in other countries whom she does trades with...albeit even for a time being only. So lets us enjoy & celebrate with the current high GDP growth of China while we still can.

China envy

October 23, 2009 4:23 PM

China is not so much a part of the world economy, that when it thrives, the rest of the world will thrive with it, and when it hurts, the rest of the world will hurt with it. Cheering against China is therefore cheering against your own country, especially if your country is the US.

Those who want China to succeed are naturally happy that it is. Those who don't, should, because that means fewer and fewer Chinese will want to emigrate to the West.

Richard Callian

October 23, 2009 8:26 PM

I'd like to know why all the journalists have such confidence in this 8.9% figure. Where does it come from? Nominal GDP for third quarter was 77,955 for this year vs. 73,299 (for last year) (100 million Yuan). That equates to a 6.4% growth year-over-year. Even the Chinese statistical agency shows a year-over-year real growth rate of only 7.7% in real terms. And, so if you look at second quarter (74,117) vs. third quarter growth, you get 5.2% growth. Someone's calculator needs fresh batteries. Don't journalists verify information anymore?

Xiang Yu

October 23, 2009 10:43 PM

The more China spend on itself, the less China has to spend on US junk bonds. Good for China, too bad for US. Bohoo


October 24, 2009 11:19 PM

I love the nay-sayers. According to their figures, no Chinese except the super-rich can buy a car. Yet China has become the largest car market in the world without banks giving car loans to people. Cars are high-ticket items. Meaning if they're buying cars , they're also buying everything else. Thsi is just more propaganda from those fearing the era of the Western economic model is over. Meaning the West loses influence in the world.


October 25, 2009 7:53 PM

China's economical data are different than western ones. For example, China's retail doesn't include the trade in rural China, especially the trade among farmers and residents in small towns. Most of Chinese buy groceries from those convenient open market which is close to their home and products are more fresh. China's retail also does not include the sale in those small shops. Many of coomunity services are not included in China's economy too. Taking about China's economy, reporters have to understand what they mean in Chinese.


October 25, 2009 8:35 PM

No. It is going to stop growing and start declining. Just keep predicting and it will come true some day. If not next year, then next decade, or next century. After all, no country can keep growing for ever. Right?


October 26, 2009 11:10 AM

It is not only sustainable for the forseeable future it is also highly likely that the growth rate will accelerate in 2010 and 2011. China won't stop growing south of 8% per annum until its per capita GDP is US $10,000. then we can start talking about a slow down in the growth rate that will still make the size of Chinese economy twice that of the US by 2035.


October 26, 2009 7:15 PM

Check this out. China, at 75, ranks 30 places below (when compared to India) in the Global Prosperity Index Rankings.

China's GDP growth is hollow because it seems most Chinese are not properous.


October 28, 2009 11:58 PM

"ALL"s comparison with India is interesting. What always confuses me is how a nation which is heavily dependent on exports to US, which cuts the people wages & funds SOEs, is able to grow in this recession ? People dont make enough money to engage in US style consumerism. I have come across many articles which say that the major concern for Chinese households is to save for health care & to care for ageing parents. I understand that most Chinese commenters here are city dwellers & their lifestyle may not have been affected much. Do we have any insight into rural China ? I've heard that urban China vs rural China are poles apart ?

My guess is that China is cooking up the numbers to prevent FDI from leaving the country.


October 29, 2009 1:46 AM

@All: check this out, China only trails U.S. in billionaires,, we may have 400 billionaires, but this country is flat broke.

To Confusedious

December 17, 2009 11:58 PM

You are partially right... The Chinese government's plan is to reduce the percentage of rural people to an extremely small number. State owned enterprises rarely cut pay in China, because they dare not and is not necessary to do so. Private companies do cut pays. Health insurance is improving in a super fast pace that Obama has been dreaming about, especially in rural areas - at least we are communists, right?

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