China GDP may reignite global growth panic

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China may ignite fresh panic over the state of the global economy when it reports its third quarter gross domestic product (GDP) on Tuesday, which could confirm a marked slowdown in the world's main growth engine.

The economy is forecast to have grown 7.2 percent in the July-September period, according to a Reuters poll, the slowest pace since the first quarter of 2009 and down from 7.5 percent in the previous three months.

"The sagging housing market has affected the economy more broadly, weighing on investment and on commodity production," Alaistair Chan, economist at Moody's Analytics, wrote in a report.

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"A bright spot was the acceleration in exports, but this was not sufficient to keep the economy from growing below potential," he said.

China Plenum, data deluge on tap this week
China Plenum, data deluge on tap this week   

Recent economic indicators, including weaker-than-expected inflation, have painted a grim picture of the world's second-largest economy. China's annual consumer inflation slowed to 1.6 percent in September, a level not seen since January 2010, suggesting rising risks of deflation.

The weakening inflationary pressure is a reflection that the economy is growing below its potential growth rate, with too much spare capacity and too little demand, economists explain.

China GDP a 'win-win'

From a markets perspective, while the disappointing growth number may initiallyspark further concerns about global recovery, it should be offset by bets of more stimulus measures ahead, said Vishnu Varathan, senior economist at Mizuho Bank.

Stan Shamu, strategist at IG, calls China's upcoming GDP data a "win-win" scenario:"If the number misses, there'll be calls for stimulus. If the number impresses, markets will feel things are not as bad as initially thought."

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Over the weekend, media outlets reported that the People's Bank of China is planning a liquidity injection.

The central bank is set to inject about 200 billion yuan ($32.66 billion) worth of three-month loans into five or six listed banks, according to Reuters, in a move that some analysts said is intended to keep liquidity ample and bolster growth.

Stimulus options

While the temptation to move beyond targeted measures will be strong, Beijing will refrain from broad-based stimulus, said Dariusz Kowalczyk, senior economist at Credit Agricole.

"Broad-based monetary or fiscal easing would involve leveraging up the economy – a cost the government is keen to avoid," he said.

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"We continue to bet that policy rates will not be cut and that more limited steps will be taken to help stabilize growth, such as targeted RRR cuts, reduction in repo rate, and broader use of various forms of rel-ending and short-term financing," he added.