Can China’s rebound last? A look behind the latest GDP numbers

China’s economic recovery from the pandemic slump is broadening out, with data on Monday showing stronger growth in manufacturing and consumer spending.

Here’s a look behind the headline numbers to see whether the rebound can be sustained:

Missed Estimates

Gross domestic product climbed 4.9% in the third quarter from a year ago, faster than the previous quarter’s 3.2% expansion, but missing the 5.5% gain forecast by economists surveyed by Bloomberg.

Part of the reason for the lower than forecast number may be the surprise strength in imports, which surged 13.2% in September from a year ago. Even though that depressed the net contribution of trade to the calculation of GDP, economists like Liu Peiqian at Natwest Markets Plc point out that it nevertheless indicates robust demand. Net exports contributed only 0.6 percentage point to China’s GDP expansion in the third quarter, according to the National Bureau of Statistics.

The economy expanded 0.7% in the year to date, meaning that the world’s second-largest economy regained all the ground it lost in the first half.

Consumer Confidence

While industrial sectors are still leading the recovery, consumers have finally started to catch up. Retail sales growth accelerated to 3.3% in September, well above the 1.6% median estimate in a Bloomberg survey of economists. An unexpected surge in vehicle sales definitely helped, but even excluding that, retail sales were up 2.4% from a year ago. Restaurants continue to register declines from a year ago, but improved to -2.9%. With the virus largely under control, and evidence of robust spending through the recent Golden Week holidays, the data suggest consumers are starting to open their wallets again. Still, there’s a lot of ground to make up, with retail sales down 7.2% in the nine months through September from the same period last year.

Property Gain

Property investment outperformed, expanding 5.6% in the nine months through September from the same period in 2019, even as the Chinese government tightened its grip on the sector with new measures that state-run media have called the “three red lines.” While the real estate sector has been a support to economic growth, there are worries about rising indebtedness. That’s been made clear recently by property developer China Evergrande Group, which faced a possible cash crunch last month.

Fixed Investment

While growth in fixed asset investment turned positive in the nine months through September, “a surprise remains the weak pace of infrastructure investment,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings. That could reflect the “difficulty local governments are having in finding good projects,” he said. State-led spending continued to be the key factor in investment, with infrastructure spending expanding 0.2% in the past three quarters, while private fixed asset investment continued to contract.

Rising Leverage

The leverage ratio of China’s real economy—the percentage of debt in households, non-financial enterprises and governments to total GDP—increased to 269.2% in the third quarter, according to data compiled by Bloomberg. That’s a reflection of the monetary and fiscal steps policy makers have been implementing to shield the economy from the effects of the coronavirus pandemic. Key to watch is whether the ratio will ease when economic growth returns to normal.