In the third quarter of 2023, the Chinese economy demonstrated remarkable resilience, managing to navigate through various unexpected difficulties while maintaining steady performance indicators within a reasonable rangeAs we near the end of the year, the foundations of economic recovery seem to be stabilizing, with a significant number of positive factors emergingAlthough some of the stability measures introduced earlier might only show their effects in the fourth quarter, there are expectations for a continuous and gradual uptick in economic growth by then.

On October 24, China’s National Bureau of Statistics reported important data indicating that, during the first three quarters, the nation's gross domestic product (GDP) reached approximately ¥87.03 trillion, reflecting a year-on-year growth rate of 3%. This marks an acceleration of 0.5 percentage points compared to the first half of the year

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A closer look reveals that in the third quarter alone, GDP stood at ¥30.76 trillion, achieving a year-on-year growth of 3.9%, which is a significant increase of 3.5 percentage points from the second quarter.

Diving deeper into the industrial landscape, production has shown considerable recovery, despite facing challenges from a sporadic resurgence of COVID-19 cases and extreme weather conditionsInvestment growth has notably rebounded, particularly in infrastructure which has maintained double-digit growth ratesManufacturing investment has also proven resilient, serving as effective counterweights to the downturn in real estate investmentMoreover, consumption has successfully turned around from a negative growth phase in the second quarter, beginning to stabilize its crucial role in driving economic developmentIn the face of a complex and challenging international environment, foreign trade has shown strong resilience, contributing positively to macroeconomic stability through rapid growth in net exports.

Overall, the third quarter's economic performance illustrates China's ability to overcome a multitude of unexpected challenges, restoring crucial indicators back to a state of stability while accumulating positive factors

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With some stability initiatives likely resulting in more noticeable impacts in the fourth quarter, there are anticipations for continued growthHowever, it remains essential to recognize the increasingly complex external environment and the still fragile recovery foundations domestically, indicating that sustained efforts to stabilize growth will be necessary.

The year-on-year GDP growth in the third quarter recorded a notable rise of 3.9%, exceeding market expectations and showing a significant acceleration of 3.5 percentage points when compared to the second quarterThis improvement can be attributed to two key factors: the effective control of the pandemic which has lessened its economic impact, and the ongoing implementation of a comprehensive suite of economic stabilization policies that have gradually propelled recoverySpecifically, the contributions from the three main sectors driving growth—consumption, investment, and net exports—have all markedly improved.

Data indicates that final consumption expenditures accounted for 41.3% of economic growth in the first three quarters, directly contributing 1.2 percentage points to GDP growth

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In the third quarter alone, this figure surged to a staggering 52.4%, driving GDP growth by 2.1 percentage pointsSimilarly, capital formation also made significant contributions, with a 26.7% share of growth in the preceding quarters, contributing 0.8 percentage points to GDP growth, while in the third quarter it accounted for 20.2%, again equating to a 0.8 percentage point contributionAdditionally, net exports of goods and services contributed 32% to growth in the first three quarters, achieving a 1.0 percentage point impact on GDP growth which further solidified to 27.4% and 1.1 percentage points in the third quarter respectively.

According to CITIC Securities, there remains ample scope for stimulating economic growth through policy maneuveringThey predict that macroeconomic regulations will continue to prioritize stabilizing growth, with the government likely to introduce targeted measures to address existing structural challenges, anticipated to propel GDP growth to around 4.6% in the fourth quarter.

The industrial sector saw a swift resurgence as the supply chains stabilized during the third quarter, with the value added in major industries increasing by 4.8% year-on-year, rebounding by 4.1 percentage points from the preceding quarter

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Monthly indicators for July, August, and September show respective year-on-year increases of 3.8%, 4.2%, and an impressive 6.3%, highlighting sustained improvementsParticularly noteworthy is the significant acceleration observed in September, which exceeded market expectationsAnalysts at GF Securities attribute this surge to several underlying reasons, including a lower comparative base from the previous year, the diminishing impact of high-temperature disruptions, and the positive effects stemming from robust infrastructure investment.

Moreover, data from the National Bureau of Statistics reflects solid growth in industrial output within key provinces such as Guangdong (5.5%), Jiangsu (10.5%), Shandong (7.6%), and Zhejiang (7.4%), underscoring a favorable backdrop for industrial recoveryIt is also crucial to note that the pace of recovery varies across different economic sectors, with industries less affected by the pandemic, such as manufacturing and exports, exhibiting quicker recovery trajectories

This trend is supported by experiences from 2020, reinforcing the notion that sectors less disturbed by COVID-related disruptions return to growth more swiftly.

Investment trends show signs of encouraging recovery, particularly in infrastructureFrom January to September, national fixed asset investments (excluding rural households) registered a year-on-year growth of 5.9%, slightly up from the previous monthsIn the third quarter, this investment category grew by 5.7%, displaying a 1.5 percentage point gain over the second quarterOn a month-by-month basis, September saw an increase of 0.53%, continuing a trend of growth over the previous months.

Analyzing the components, infrastructure investment has consistently demonstrated high growth rates, reflecting the ongoing impact of stability policies

Manufacturing investments have also showcased strong resilience, whereas declines in real estate investments have begun to slowNationally, infrastructure investments rose 8.6% year-on-year, comprehensively extending its growth trend over recent monthsSpecific sectors such as hydrological management (15.5%), public facility management (12.8%), and information transmission (12.2%) displayed impressive growth, while the manufacturing sector saw a year-on-year increase of 10.1%. Real estate investment, however, shrank by 8.0% over the same period, albeit slowing down compared to earlier months.

CITIC Securities forecasts that infrastructural investment will remain robust through the year, potentially achieving an annual growth rate exceeding 12%, buoyed by policy-friendly development financing tools and special bond cap limitsMoreover, the widening gap between the Consumer Price Index (CPI) and the Producer Price Index (PPI) is expected to enhance profitability for mid-to-lower tier manufacturing sectors

Our view can also incorporate recent initiatives from the Ministry of Finance and other departments promoting favorable tax deductions on equipment renewal and a significant 200 billion yuan re-loan reserve for equipment upgrades, which are likely to maintain growth momentum in manufacturing investments.

On the front of consumer activity, despite an overall increase of 0.7% in retail sales year-on-year across the first three quarters, consumption showed some volatilityThe second quarter faced a downturn of 4.6% compared to the previous year, while the first and third quarters exhibited respective increases of 3.3% and regained momentum in consumer spendingNevertheless, in September, consumption growth did taper off, recording a 2.5% increase year-on-year, down by 2.9 percentage points from August levelsThis fluctuation is indicative of several underlying factors influencing consumer behavior.

One significant concern arises from the continued uncertainties related to the pandemic

The uneven nature of the recovery has seen the consumer market fluctuate significantly over the past year and a half, with early striking growth in January shifting to a dramatic drop in April, a following recovery in June, and another decline in SeptemberAdditionally, the downturn in real estate has reportedly constrained consumer spending related to construction materials, home electronics, and furnishings, revealing the downstream effects of the sluggish real estate market.

Another conspicuous aspect is the rise in precautionary savings as households respond to economic uncertainties stemming from the pandemicCITIC Securities posits that when the disparity between disposable incomes and expenditures is assessed, an upwards trend in savings becomes apparentThis inclination has been tempered by households prioritizing saving over immediate consumption amidst uncertainty.

On the export front, China has maintained robust growth throughout the past nine months, providing significant support to economic stability

Data from the General Administration of Customs showed that in U.Sdollar terms, exports for the first three quarters reached approximately $2.7 trillion, reflecting a 12.5% year-on-year increaseHowever, the repercussions from rapid increases in interest rates in developed markets have begun to surface, with notable declines in exports during August and September.

In September alone, the year-on-year export growth rate (in dollar terms) dropped to 5.7%, down 1.4 percentage points compared to the preceding monthGuosheng Securities illustrated that the recent export decline is attributed to several critical factors—rising base effects, weakening external demand, and declining export pricesIn terms of external demand, global Purchasing Managers’ Index (PMI) readings have slid for four consecutive months, dipping below the threshold line in September, concurrently with evident reductions in export growth rates from greatly export-oriented economies such as South Korea.

The decline in export prices also contributes to this downward trend, showing strong correlation with PPI movements domestically