BEIJING (Reuters) - China’s economic growth slowed more than expected to 6.0% year-on-year in the third quarter, the weakest pace in at least 27-1/2 years, as demand at home and abroad faltered amid a bruising Sino-U.S. trade war.

People walk on a crossing with light signals for pedestrians near shopping malls in Shenyang, Liaoning province, China October 16, 2019. REUTERS/Stringer

Friday’s data marked a further loss of momentum for the economy from the second quarter’s 6.2% growth, likely raising expectations that Beijing needs to roll out more measures to ward off a sharper slowdown.

Analysts polled by Reuters had forecast gross domestic product (GDP) to grow 6.1% in the July-September quarter from a year earlier.

KEY POINTS

* Q3 GDP +6.0% y/y (f’cast +6.1%, prev +6.2%)

* Q3 GDP +1.5% q/q (f’cast +1.5%, prev +1.6%)

* September industrial output +5.8% y/y (f’cast +5.0%, prev +4.4%)

* September retail sales +7.8% y/y (f’cast +7.8%, prev +7.5%)

* Jan-September fixed asset investment +5.4% y/y (f’cast +5.4%, Jan-Aug +5.5%)

* China Jan-September property investment +10.5% y/y

COMMENTARY:

TORU NISHIHAMA, CHIEF ECONOMIST, DAI-ICHI LIFE RESEARCH INSTITUTE, TOKYO

“The Chinese authorities must be taking the economic situation quite seriously. The U.S.-China trade war has worsened China’s jobs and wage situation and corporations also refrained from making capital investment.”

“External risks from the trade friction between the U.S. and China have eased and we expect there will be public infrastructure spending. So, downside pressure to the economy in the fourth quarter has been eased.

“There is speculation in the markets that the central bank in China may expand monetary policy, but considering higher inflation it would be difficult for the central bank to do so.

“There is still a possibility that the trade friction between China and the United State would flare up again, which would put downward pressure on the Chinese economy.”

NAOTO SAITO, CHIEF RESEARCHER, DAIWA INSTITUTE OF RESEARCH, TOKYO

“This year the growth rate has been slipping by 0.2 percentage point every quarter and we are likely to see it falling below 6% in the final quarter.”

“Policymakers are likely to take more economic steps next year, the final year in their policy target, to double GDP. The problem is policy options they can use are growingly limited.

“One is more infrastructure spending. This will be made possible by fiscal spending, especially by local governments. The other one would be consumption stimulus. But mysteriously, after Beijing announced the outline of such measures on Jan. 23, it hasn’t done anything yet. I expect they will take concrete steps next year.

“Chinese policymakers would want to see whether the latest deal with the U.S. will be ‘papered’ at APEC meeting on Nov. 16-17. And then they would need to see if Washington will postpone the planned tariff on Dec. 15.

“If those things happen, there will be more expectations of a bottom-out in the Chinese economy as investors expect the U.S. administration to calm down a bit on trade war ahead of the election. And any economic measures will become far more effective.”

KAORI YAMATO, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

“China’s exports were weak, but imports were also weak. On a net basis, it may not seem like a problem, but the GDP data was clearly weaker than expected.”

“Another problem is a slowdown in infrastructure investment and a slowdown in investment by companies because of worries about the trade war.

“It will take a little more time for government spending on infrastructure to boost growth, but I’m not pessimistic because money is flowing to regional governments. Corporate tax breaks really haven’t worked because companies are uncertain about the trade war.

“China’s economy probably won’t worsen further, because infrastructure spending and investment related to new environmental standards will eventually hep growth. Also, consumer spending is holding up.”

ALICIA GARCIA HERRERO, CHIEF ECONOMIST: ASIA PACIFIC, NATIXIS, BEIJING

“China’s Q3 GDP growth came in below market expectations at 6.0% Y-o-Y, which was dragged mainly by the manufacturing sector. As such, we have already lowered our GDP growth forecast to 6.1% for 2019 given China’s limited room to push up growth despite a partial deal with the United States.”

“In other words, we finally clearly see the impact of the trade war and lack of real response of the Chinese economy to stimulus. I think the number is worrisome for 2020 unless China takes some big action. The only immediate one for the manufacturing sector is a devaluation of the renminbi. I think they are leaning towards this.”

JEFF NG, ECONOMIST, CONTINUUM ECONOMICS, SINGAPORE

“Growth retreated as expected, but below market expectations. At this point, I think that China’s GDP will grow 6% in the last quarter... I don’t think they have the policy room for more stimulus and there’s a chance that they will register growth numbers lower than 6% in Q4.”

“In terms of Chinese stock and debt markets, I don’t think they’re impacted too much by the GDP numbers. They’ve had some near-term reprieve thanks to the progress in talks with the U.S. and they’re dependent on the trade talks.”

MITUL KOTECHA, SR EMERGING MARKETS STRATEGIST, TD SECURITIES, SINGAPORE

“The numbers could have been worse. If anything there was some fear it might drop below 6% but that didn’t happen. What’s overshadowing this is, from the point of view of sentiment, for now anyway, is the industrial production numbers. It highlights that there is a bit of a glimmer of hope on the manufacturing side and some hope that trade progress will help further.”

FRANCES CHEUNG, HEAD OF MACRO STRATEGY FOR ASIA, WESTPAC BANKING CORP, SINGAPORE

“While GDP was a tad below expectation, this series have been very stable that the market may not pay too much attention to as long as it has not dipped below 6%.”

“The monthly data shows some return of growth momentum, but it was unclear as to what was behind the strong production of some goods such as machineries and telecommunication products.

“Overall it is a mixed bag of outcome. With the constructive backdrop for risk sentiment today the market may tend to have a positive interpretation. But after the initial – likely mild reaction, the market is likely to look past it.

“The rebound in industrial production is encouraging, but the growth outlook has not brightened up yet with various tariffs still in place. The PBoC is likely to stay supportive, and we continue to expect some liquidity release via a 50bp cut in the reserve ratio by the year-end.”

HO WOEI CHEN, ECONOMIST, UOB, SINGAPORE

“It is actually in line with our forecast. I think the tertiary sector’s stability, or rather the improvement in the tertiary industry is very important for China. Around half of growth is actually contributed by the tertiary industry.”

“But I think the slowdown is set to continue. There is a lot of uncertainty, still, regarding the U.S.-China trade agreement. I think the Dec. 15 tariffs will have very important implications for Chinese growth in 2020. Beijing’s approach has been rather measured and targeted and they will continue to be so.

“I think they will continue to take interest rates lower via the loan prime rate, but it’s not going to be a big drop, it’s going to be gradual. I think fiscal policy wise there’s a lot more they can do.”

BACKGROUND:

- China’s economic growth has been slowing since last year as the trade war with the United States takes a toll on factory activity, exports and domestic demand, suggesting that a spate of stimulus measures including tax cuts and easier lending rules are yet to have a notable effect on overall growth.

- The outlook is unlikely to change for the better any time soon even though the trade tensions between Beijing and Washington have eased somewhat.

- U.S. President Donald Trump said last week the two sides had reached an agreement on the first phase of a deal and suspended a tariff hike, but officials said much work still needed to be done.

- The International Monetary Fund has warned the trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, but said output would rebound if the dueling tariffs were removed.

- Beijing has relied on a combination of fiscal stimulus and monetary easing to weather the current slowdown, including trillions of yuan in tax cuts and local government bonds to fund infrastructure projects and efforts to spur bank lending.

- But the economy has been slow to respond with business confidence shaky and local governments facing increasing strains as tax cuts hit revenues, weighing on investment.

- Analysts in a Reuters poll expect the People’s Bank of China (PBOC) to ease policy further by cutting banks’ reserve retirement ratios and the one-year loan prime rate, a new benchmark lending rate.

- China’s economic growth is expected to cool to 6.2% this year, a near 30-year low, according to a Reuters poll. The economy grew 6.6% last year.