China's GDP growth likely to be 6.8% in Q4

As the higher frequency indicators have suggested, the Chinese economy struggled in Q3, when it grew by 6.9% y/y, lower than the 7.0% in Q1 and Q2. This was in line with market consensus but lower than our expectation of 6.6%. 

China is at crossroads between the old and new growth models. The "old normal" growth drivers such as heavy manufacturing and investment are deteriorating fast and contributing less to growth. The secondary industry, manufacturing and construction, accounted for 41% of GDP in Q3 and grew by 6%. 

Industrial production grew by 5.7% in September, just slightly better than the 5.6% growth in March this year, which was the lowest in 6 years. This was hardly any surprise as the PMI index has fallen to a multi-year low in recent months.

At the same time, the "new normal" growth drivers such as consumption and service sector expand robustly. Service sector expanded by 8.4% in Q3 and accounted now for 51% of GDP. 

During the Golden Week National Day holiday this year, a total of 526 million tourists have travelled between 1 -7 October, according to official data. This was an 11% increase from the corresponding period last year. Tourist revenues during this 7-day period increased 17% from last year.

"Looking forward, the Chinese economy will likely continue facing structural challenges such as overcapacity and corporate debt overload that limits business investment appetite. However, no imminent collapse of the Chinese economy is expected as government support will likely keep growth fairly stable", says Nordea Bank. 

However, given that return on investment and return on credit are declining, they have become less effective stimuli compared to in 2009. Therefore, the government stimuli are not likely to boost GDP growth significant, only sufficient to keep growth free-falling. GDP growth is likely to be 6.8% in Q4.