WSJ-China grew at 6.9 percent

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BEIJING—China’s once-world-beating economy sputtered further in the third quarter, decelerating to its slowest pace since the global financial crisis and adding to concerns about the world economic outlook.

The 6.9% growth rate for the third quarter—dipping below 7% for the first time since 2009—clouds China’s prospects for reaching the official targeted growth rate of about 7% for the year. It also renews pressure on Beijing to enact more pro-growth measures. 

“Overall it’s pretty disappointing,” said Société Générale CIB economist Klaus Baader, who expects fourth-quarter growth of 6.8%. “Investment continued to slow pretty sharply despite efforts by the government to support the economy. It doesn’t seem to be sufficient.”

The better-than-expected result—a Wall Street Journal survey of 13 economists forecast a median 6.8% gain—is likely to renew debate over the accuracy of China’s growth statistics. Other economic data released on Monday showed disappointing results in investment and industrial production. Earlier this month, China pledged to start following a stricter global standard in calculating its data.

Even in slowdown, China continues to grow at a pace that other major economies envy. China’s economy is nearly twice the size it was just six years ago, meaning at lower growth rates it remains a major engine for global consumption and production.

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Speaking at an event to promote entrepreneurism in Beijing on Monday, Premier Li Keqiang said “even though it was 6.9%, it is still a growth rate of around 7%.” He said employment had improved and that innovation was helping the country restructure its economy.

Still, the deceleration has been faster than expected by the Chinese leadership, which at times has fumbled as it tries to restructure the economy to rely more on consumer spending and services. That effort, which economists say is key to nurturing long-term growth, is making headway. But Beijing’s appetite for overhauls appears to be slowing as it moves to shore up the economy near term.

A major challenge is demand, both at home and for exports. Xiang Yili, general manager of Wenzhou Topteam International Trade Co., which exports stationery products, said sales at the closely held company fell 10% in the third quarter year to year and will probably do the same in the fourth quarter. The company, based in China’s Zhejiang province, has bought more automation equipment to cut costs but the outlook remains difficult, she said.

“I think it could take two or three years for things to really improve,” Ms. Xiang said.

Economists expect the central bank will cut interests rates at least once and further reduce banks’ required reserves before the end of the year. Past efforts, including five interest-rate cuts and several rounds of reductions to the reserve level since November, have failed to reboot growth.

Despite the slowdown, Chinese leaders haven’t backed away from the 2015 annual growth target of about 7%. The push to reach the annual benchmark has renewed attention on the quality of Chinese statistics, adding to long-standing questions over Beijing’s methodology and whether the results are subject to political pressure.

The National Development and Reform Commission, China’s top planning agency, recently defended the accuracy of official data, saying that claims of inflated growth were “logically wrong” and “unreliable.” Much of China’s growth now comes from services, which aren’t as well reflected in such traditional measures as industrial production, electricity use and freight rates, it said in a recent online statement. In a separate statement, the agency said the government has plenty of options to meet the growth target.

Beijing has approved more than 200 rail, highway, energy and sewer projects since January worth more than 1.8 trillion yuan ($283.8 billion) and urged banks to step up lending for infrastructure. Strong loan growth in September bolstered signs that the government-orchestrated spending campaign is starting to gather momentum.

Overall, China’s economy remains hobbled by hefty debt, overbuilding in housing and excess manufacturing capacity. The manufacturing sector, the world’s largest, has seen slumping profit and 43 straight months of deflation.

The struggles of the real estate sector will subtract an estimated 1.5 percentage points from growth this year, according to UBS. While property sales have picked up recently in some parts of the country, a huge number of unsold homes in smaller cities remains, leaving developers reluctant to invest and buyers waiting for further price reductions.

“I am planning to buy another apartment,” said Wen Qi, a local government worker in eastern Zhejiang province, her second. “But I am still waiting for property prices to drop further,” she added. Ms. Wen said she hasn’t cut back on household appliances and has even seen a silver lining from the slowing economy: “It makes life easier because restaurants or retail stores offer discounts to attract customers.”

China’s industrial production grew by a disappointing 5.7% year on year, according to the National Bureau of Statistics. That was lower than the 5.9% growth expected. Fixed asset investment came in below expectation at 10.3% suggesting that government measures to support economic activity haven’t gained sufficient traction. Retail matched expectations with a 10.9% growth rate.

Economists said the government was in a bind over how much the announced third-quarter growth rate could depart from the annual 7% target. After the weakness shown throughout much of the quarter, producing a 7% figure would have sparked “an outcry in the analyst community and hearty guffaws elsewhere,” Westpac Bank said in a recent report.

The growth figures that China releases, Westpac said, often appear aimed at meeting two political-economic goals: having the growth data appear credible, and having the growth target appear achievable.

“The statistics agency clearly doesn’t feel constrained by science and arithmetic in certain cases,” said Westpac economist Huw McKay.China’s fiscal spending surged 26.9% from a year earlier to 1.78 trillion yuan in September, it said on Monday.

Chinese leaders are also likely to heap more pressure on local officials—some of whom were punished in recent months for what officials called “laziness” and inaction—to fully spend their budgets and fast-track infrastructure projects.

China’s third quarter featured several policy missteps that dented growth, rattled global markets and lowered confidence in Beijing’s economic management. The government botched a rescue of the stock markets, which fell 29% during the quarter before partially recovering this month, and announced a surprise devaluation of the currency—a move that global investors saw as a sign China’s economy was struggling. UBS estimates that the slumping stock market will shave as much as 0.5 percentage point from growth in the second half.

The Chinese economy has been responsible for roughly one-third of world growth over the past seven years. This month, the International The National Development and Reform Commission, China’s top planning agency, recently defended the accuracy of official data, saying that claims of inflated growth were “logically wrong” and “unreliable.” Much of China’s growth now comes from services, which aren’t as well reflected in such traditional measures as industrial production, electricity use and freight rates, it said in a recent online statement. In a separate statement, the agency said the government has plenty of options to meet the growth target.

Beijing has approved more than 200 rail, highway, energy and sewer projects since January worth more than 1.8 trillion yuan ($283.8 billion) and urged banks to step up lending for infrastructure. Strong loan growth in September bolstered signs that the government-orchestrated spending campaign is starting to gather momentum.

China’s fiscal spending surged 26.9% from a year earlier to 1.78 trillion yuan in September, it said on Monday.

Chinese leaders are also likely to heap more pressure on local officials—some of whom were punished in recent months for what officials called “laziness” and inaction—to fully spend their budgets and fast-track infrastructure projects.

China’s third quarter featured several policy missteps that dented growth, rattled global markets and lowered confidence in Beijing’s economic management. The government botched a rescue of the stock markets, which fell 29% during the quarter before partially recovering this month, and announced a surprise devaluation of the currency—a move that global investors saw as a sign China’s economy was struggling. UBS estimates that the slumping stock market will shave as much as 0.5 percentage point from growth in the second half.

The Chinese economy has been responsible for roughly one-third of world growth over the past seven years. This month, the International Monetary Fund lowered its 2015 global growth forecast to 3.1% from its 3.3% estimate in July, citing China as well as weakness in Europe and Japan and the slowdown in countries producing commodities.

Monetary Fund lowered its 2015 global growth forecast to 3.1% from its 3.3% estimate in July, citing China as well as weakness in Europe and Japan and the slowdown in countries producing commodities.

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Overall, China’s economy remains hobbled by hefty debt, overbuilding in housing and excess manufacturing capacity. The manufacturing sector, the world’s largest, has seen slumping profit and 43 straight months of deflation.

The struggles of the real estate sector will subtract an estimated 1.5 percentage points from growth this year, according to UBS. While property sales have picked up recently in some parts of the country, a huge number of unsold homes in smaller cities remains, leaving developers reluctant to invest and buyers waiting for further price reductions.

“I am planning to buy another apartment,” said Wen Qi, a local government worker in eastern Zhejiang province, her second. “But I am still waiting for property prices to drop further,” she added. Ms. Wen said she hasn’t cut back on household appliances and has even seen a silver lining from the slowing economy: “It makes life easier because restaurants or retail stores offer discounts to attract customers.”

China’s industrial production grew by a disappointing 5.7% year on year, according to the National Bureau of Statistics. That was lower than the 5.9% growth expected. Fixed asset investment came in below expectation at 10.3% suggesting that government measures to support economic activity haven’t gained sufficient traction. Retail matched expectations with a 10.9% growth rate.

Economists said the government was in a bind over how much the announced third-quarter growth rate could depart from the annual 7% target. After the weakness shown throughout much of the quarter, producing a 7% figure would have sparked “an outcry in the analyst community and hearty guffaws elsewhere,” Westpac Bank said in a recent report.

The growth figures that China releases, Westpac said, often appear aimed at meeting two political-economic goals: having the growth data appear credible, and having the growth target appear achievable.

“The statistics agency clearly doesn’t feel constrained by science and arithmetic in certain cases,” said Westpac economist Huw McKay.