Instant View: China's third quarter GDP grows 6.8 pct y/y, in line with forecasts

BEIJING (Reuters) - China's economic growth slowed slightly as expected in the third quarter as the government's efforts to rein in the property market and debt risks tempered activity in the world's second-largest economy.

While China produced forecast-beating growth of 6.9 percent in the first half, many economists and investors had expected momentum would start to fade as the government cracks down on riskier lending and speculation in the housing market.

China' central bank governor said earlier this week that the economy could grow 7 percent in the second half of this year, while stressing that more needed to be done to reduce the risks from a rapid build-up in debt.

KEY POINTS

* Q3 GDP +6.8 pct y/y (f'cast +6.8 pct, prev +6.9 pct)

* Q3 GDP +1.7 pct q/q (f'cast +1.7 pct, prev +1.8 pct)

* Sept industrial output +6.6 pct y/y (f'cast +6.2 pct, Aug +6.0)

* Sept retail sales +10.3 pct y/y (f'cast +10.2 pct, Aug +10.1 pct)

* Jan-Sept fixed asset investment (FAI) +6.0 pct y/y (f'cast +7.7 pct, Jan-Aug +7.8 pct)

COMMENTARY:

BESA DEDA, CHIEF ECONOMIST, ST GEORGE BANK, SYDNEY

"It is a solid result. If the trend that we've seen in the last few quarters continues, there is a very good chance that growth in 2017 will be higher than the previous year and that has not happened since 2009.

"China's GDP data also reinforces strong global growth outlook. Other data such as retail and industrial output that came out along with GDP support the notion that we should see a robust outcome for Q4.

"Given that the growth outcome is above the government's target, there is room for some more reforms and it might come after the politburo meeting."

LI HUIYONG, ECONOMIST, SHENWAN HONGYUAN SECURITIES CO

"The GDP data is in line with market expectations. It's worth pointing out that investment growth is considerably below expectations, as investment in industrial sectors such as manufacturing and mining dropped.

"But the real estate sector posted healthy gains, although the fall in sales area and prices shows the government's property curbs are starting to work.

"Going forward, we expect the growth rate to be flat, and we're neither too pessimistic, nor optimistic.

"We expect 6.6-6.7 percent GDP growth in the fourth quarter, as production restrictions in some areas would have a relatively big impact on growth. Growth could come under pressure in the second half of next year.

"Liquidity would remain relatively tight, due to domestic financial regulation, and expected further tightening by the U.S. Federal Reserve.

"An expected slowdown in the property market would also inevitably have an impact on growth."

NIE WEN, ECONOMIST, HWABAO TRUST IN SHANGHAI

"The Q3 GDP data matched market expectations, although it was below PBOC governor Zhou Xiaochuan's H2 forecast of 7 percent.

"In the third quarter, funding costs rose to drag the private investment lower. The overall investment also fell and the prospects for investment are still not optimistic. In the property sector, although the real estate market recovered in third- and fourth-tier cities, the general policy contained the whole sector. In the same period, more environmental protection requirements were implemented, which would create more restrictions on investment.

"The Chinese yuan strengthened in the third quarter, and that has created some negative impact on exports."

SUAN TECK KIN, ECONOMIST, UNITED OVERSEAS BANK IN SINGAPORE

"If you look at the breakdown, I think services, the tertiary sector is driving the activity. This particular sector has been a key driver over the past few years for China.

"Manufacturing didn't do as well in the third quarter...If you look at the drivers, tertiary sector will be the one that will be driving China's economy.

"For the rest of this year, they will continue with the policy of deleveraging. I imagine that activities in the housing market will be controlled, that means lending to that sector may also be restricted.

"An interest rate hike late this year or early next year is possible, because it's part of the message of deleveraging."

KAORI YAMATO, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

"In real terms, it looks like investment fell and consumption slowed down in the third quarter. These are the reasons for the slowdown, but it is only a mild slowdown.

"Government spending and inventories probably supported growth. Overall, the data show that some deleveraging is continuing and government reforms are working but growth is still being supported at a reasonable rate.

"Overall, the data paint a healthy picture.

"I'm a little worried about real estate investment. Perhaps this part of the economy is still not under control. It is possible officials may need to take some cooling measures.

"I expect the PBOC to maintain a slight tightening bias. Interest rates are likely to remain slightly high, but if there is some problem in the financial system, I would expect the PBOC to take some targeted measures to fix it."

ELLIOT CLARKE, SENIOR ECONOMIST, WESTPAC BANKING CORP, SYDNEY

"The data was bang in line with expectations. It suggests that the momentum is sustained for growth in the second half of the year.

We don't think 7 percent is a realistic growth target though. We're looking at 6.7 through the whole year. But there are upside risks to that outlook."

MARKET REACTION

- The Australian dollar, seen as a proxy for China demand, was little changed.

- China's CSI300 stock index was slightly softer, down 0.2 percent and SSE Composite was off 0.5 percent.

- The onshore spot yuan weakened by around 90 pips to a low of 6.6367 per dollar. Its offshore counterpart followed the trend.

BACKGROUND

- China's economy has surprised global financial markets and investors with stronger growth so far this year, driven by a renaissance in long-ailing "smokestack" industries such as steel, though many analysts and global watchdogs such as the IMF warn Beijing is still too reliant on debt-fuelled stimulus to meet fixed growth targets.

- Strong government infrastructure spending and a frenzied housing market have fuelled a year-long construction boom, boosting demand for building materials from steel bars to copper pipes and imports of related industrial commodities such as iron ore.

- China's voracious appetite for resources has helped trigger a reflationary pulse in global commodity prices and manufacturing profits worldwide, even as consumer prices remain stubbornly soft, vexing major central banks.

- Exports have also rebounded after a multi-year slump, though the outlook remains clouded by fears of growing U.S. trade protectionism and worries about how long a global electronics rally will last.

- Many economists, however, believe the economy will soon lose steam, arguing that the impact of earlier stimulus measures will start to fade.

- Rising borrowing costs are also expected to curb activity eventually as the government looks to contain risks from high debt levels, though many economists say Beijing has been too cautious about tackling massive corporate and local government debt out of concern that it could slow growth too much.

- Property prices have come off the boil in China's biggest cities after waves of government cooling measures, but speculators have turned their attention to smaller cities and towns with fewer restrictions. Underlying demand for housing remains strong, however, and few analysts see a risk of a price crash.

- China's government had set a more modest economic growth target of around 6.5 percent this year, from a range of 6.5 to 7 percent in 2016 and an actual 6.7 percent, which was the slowest pace of expansion in 26 years.

(Reporting by Reuters Beijing and Shangai newsrooms and Asia bureaus; Compiled by Asia Desk; Editing by Kim Coghill and Jacqueline Wong)