Q3 GDP release: What to watch for
On Tuesday evening at 10pm ET, China will announce Q3 GDP and activity data for September (industrial production, retail sales, fixed asset investment, etc.). There will be two main ways to examine the data release: what it says about the strength of China’s recovery and what it means for the prospects for stimulus.
Data releases for August and thus far for September are consistent with the economy stabilizing but at low levels (see our take on the September PMIs HERE). Manufacturing activity is gradually picking up as infrastructure investment and other incremental stimulus measures take effect and de-stocking eases. Services activity, which has powered China’s recovery this year, is decelerating from its torrid pace after Covid reopening but still reasonably strong. However, the danger is that this remains an anemic recovery, weighed down by weak private sector demand, the broad effects of the property sector malaise, and subdued confidence. Restrained stimulus policies are not delivering the strong counter-cyclical punch necessary to quickly break out of these dynamics.
While the data release will provide the usual flood of signals on the economy, we will be especially attuned for signs of repair in household and broader private sector demand, as this will be key for a sustainable recovery in growth and corporate earnings. Property sales and related indicators will provide a sense of whether recent easing measures are having an effect; preliminary data suggest a pick-up in sales in the largest markets (tier 1 and some tier 2) but one that is thus far limited in its strength and breadth across cities. On the consumption side, August showed some improvement in household spending on goods, rather than just services, and it will be important to see whether there are further signs of progress as reflected not only in monthly retail sales but also the quarterly survey of household income and spending.
As far as stimulus, the Q3 GDP data will be the last major input into Beijing’s calculus for hitting the 5% growth target this year. Chinese officials have recently expressed confidence in their ability to hit the official target of “around 5%” for full-year 2023, which is crafted to provide some wiggle room (that is, 4.9% reported growth would be tolerable for the leadership). Bloomberg shows sell-side consensus (mean) estimates for Q3 GDP growth of 4.5% year-over-year and 0.9% quarter-over-quarter. Growth in this range would put GDP on track to hit the 5% growth target for full-year 2023. (Year-over-year growth in Q4 will be flattered by the comparison to last year when China was in the depths of the chaotic pivot out of zero-Covid.)
It would probably take a sizeable miss in Q3 GDP growth (i.e., at least below 4.3% y/y) along with signs of fading momentum in September activity to worry policymakers that the growth target is in jeopardy. Even then, additional stimulus for 2023 would be incremental. While Bloomberg News reported last week that policymakers are considering expanding the size of the official budget deficit this year to boost growth, we think that Beijing would use more targeted, less extraordinary measures. Possibilities here include: (1) tapping unused space in the budget and local government bond quotas; and (2) providing central government support for local infrastructure spending through the central bank or policy banks. Such measures would be a form of firing the “thrusters” and could provide 0.2 to 0.5 ppts of growth to help meet the GDP target – if necessary.
Following the GDP release – and barring a really bad miss – market attention will likely shift to China’s 2024 outlook and to US-China relations in the run-up to a Biden-Xi meeting (discussed further below). In early to mid-December, China’s senior Party leadership (Politburo) will meet to discuss the economy, followed by the annual Central Economic Work Conference that lays out (in broad terms) the policy settings for 2024. We will of course have more to say on the 2024 outlook and expectations for those end-year meetings as they approach.
There have also been expectations that the Party might convene a “third plenum” meeting this fall to focus on economic reforms. Such a meeting is typical at this stage in China’s five-year political cycle and could serve as the venue for Xi Jinping to offer assurances towards the domestic private sector and foreign business community about his longer-term agenda. However, it seems increasingly unlikely that a third plenum will be held and if so that it would be high-profile. A key reason is elite politics: Xi’s ongoing anti-corruption campaign in the military (which has ensnared the defense minister) makes it awkward to hold a plenum meeting, which is attended by the Party’s central committee of which the military takes up a solid portion. Some of those members will be in detention and others may be under investigation. Xi may thus decide to skip or postpone the meeting, which would further increase the importance of watching signals from the Central Economic Work Conference in December.
US-China: Where do export controls leave US companies, and a Biden-Xi meeting?
On Tuesday morning, the US Commerce Department announced a widely expected update to last year’s sweeping controls on China’s access to advanced semiconductor technology. Last week, 22V hosted a call focused on this topic with Paul Triolo of Albright Stonebridge Group (please see HERE for a call summary and the link the replay).
The big news from this update is Commerce’s announcement of new restrictions on the ability of Nvidia and other US chipmakers to sell advanced GPUs in China. The new measures appear to prevent Nvidia from exporting to China the A800 and H800 chips that the company had designed to fall below the performance threshold in the initial export controls (other chipmakers such as AMD will also be affected, at least in terms of sales of future products). The measures also impose a new licensing regime for exports of a wider set of advanced chips that fall even below this threshold. While Commerce Department officials stress that the measures will still permit sales of chips for most consumer items in China, the thresholds will be set by Commerce and thus much depends on implementation.
Other aspects of the new measures include blacklisting exports to several Chinese chip design firms and restricting chip sales to foreign subsidiaries of Chinese companies. Commerce is also proposing for comment new restrictions on US cloud computing companies offering computing power to Chinese firms seeking a workaround to purchasing GPUs.
As discussed during the Webinar, some observers had expected Commerce to delay restrictions on sales of GPUs until after a meeting with President Biden and General Secretary Xi Jinping in San Franciso on the sidelines of the APEC Leaders’ Summit (November 15-17). That Commerce decided to move head suggests a calculus that the new measures are not so escalatory as to have Xi back out of a Biden meeting, but tough enough to answer criticism from Congress and others in Washington that US and Chinese firms were exploiting loopholes in the original framework.
That calculus is probably correct in broad strokes, if a difficult balance to sustain over time. The new measures are unlikely to be disruptive to current activity/supply chains in China in such as way as to compel Xi to pull out of a meeting, which would be negative for his efforts to boost confidence in China’s outlook. However, the measures will darken the mood around the meeting, reaffirming the Biden administration’s intent to freeze China’s development in AI and advanced semiconductors and maintain as large a US lead as possible.
Will Beijing retaliate directly? Any response will likely be fairly calibrated in the run-up to the Biden meeting. Many of China’s most visible tools for retaliation would be politically appealing but could blow back against Beijing’s broader strategic goals. Targeting a high-profile US firm such as Apple would hurt business and investor confidence. Micron has been the main target of China’s retaliation in the semiconductor sector but most other US semiconductor firms are less substitutable in Chinese supply chains. At the very least, current dynamics will only entrench Xi’s determination to reduce China’s reliance on US technology and supply chains and to extend China’s leadership in sectors such as clean tech that he feels provide a potential deterrence against the US and its allies.
We will have more to say based on Beijing’s reaction and the signals from both sides as a Biden-Xi meeting draws closer.
