GDP growth options narrowing

A rebound in fourth quarter will help, as govt is likely to deepen reform and restructuring and resort to mini-stimulus approach

With the lowest quarterly GDP growth in five years, a reeling real estate sector, weak manufacturing activity and falling fixed-assets growth - the Chinese economy is facing its biggest challenge since it was hit hard by the global financial crisis.

Worse, policymakers can no longer afford to launch aggressive stimulus programs to bail out the economy, as they did five years ago. They seem to have no way out but to accelerate reform and restructuring, while resorting to targeted stimulus measures of limited scale as they attempt to gradually lead the economy out of the woods.

Moderate stimulus policies are likely in the pipeline to prevent the economy from continuing its nosedive in the fourth quarter.

With GDP growth coming in at 7.3 percent year-on-year in the third quarter - the lowest this year and the worst since the first quarter of 2009 - China may fall short of its annual target. But for optimists, the worst scenario also means the start of an upward trend.

The low growth rate is the result of weakening economic activity, as indicated by a slew of indicators in recent months. It is also the result of a higher base in the third quarter of last year, when GDP expanded by 7.8 percent year-on-year.

Those who expected the economy to hit the trough and start to climb out must have seen the signs of improvement in September's economic data. For example, industrial output grew 8 percent year-on-year, compared with 6.9 percent in August. Trade growth beat market expectations, and retail sales remained stable in September.

The job market, a big concern of policymakers, remains resilient. So far this year, more than 10 million jobs have been created, already exceeding the whole-year target set earlier this year.

What is encouraging is that the tertiary sector contributed 46.7 percent of the GDP growth in the first three quarters, up by 1.2 percentage points year-on-year and 2.5 percentage points higher than industry's contribution. Since the tertiary sector is more job-friendly, the new trend will contribute to the resilience of the job market and in turn help stabilize the economy.

Looking at the third quarter's slower growth, policymakers may opt to continue with their targeted stimulus measures. The possibility is slim that they would resort to aggressive measures because the third quarter reading exceeded market expectations. The market had expected 7.2 percent growth, or even lower.

A key sector is real estate. Policymakers could further help in that area by cutting property transaction taxes and fees, or by lowering mortgage down-payment requirements. They could increase investment in infrastructure that could spill over to boost broader economic growth. And they could also moderately ease monetary policy.

Despite the slowdown, the third quarter data, especially in September, show that previous policy supports adopted this year, including increased investment in infrastructure and major projects, as well as the development of low-priced public housing, partly offset the negative effects of a continuous property downturn.

Policymakers, therefore, may continue their mini-stimulus approach.

Given the signs that the economy was trending up in September, such stimulus measures would likely bring a mild improvement in growth in the coming months. This would bring the country closer to its annual growth target, though it remains uncertain how long the expected pick-up will last and to what extent the efforts to shore up the economy can offset the blow of the weakening real estate sector if sales continue to fall.

While the market expected to see low economic readings in the third quarter, the big test will come after the fourth quarter data come out early next year.

If the economy does not recover as expected in the fourth quarter, there will be greater anxiety among investors than what we see now.

Worse, policymakers will have few safe tools in their toolbox then. They will be reluctant to use major stimulus programs, which are risky and could result, for example, in triggering an additional pile-up of local government debt, which is already a big headache.

They may opt to continue to use targeted stimulus measures on a limited scale to boost some key sectors, but the broader market may not buy such a recipe.