China to post strong GDP but economists not sold

What to expect from China's GDP report
What to expect from China's GDP report

While China's economy is expected to have grown at its fastest pace this year during the July-September period, economists say this does not mark the start of a reacceleration in world's second largest economy.

Third-quarter gross domestic product (GDP) data, due out on October 18, is forecast to show the economy expanded 7.8 percent on year, according to a Reuters poll, up from 7.5 percent in the second quarter.

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A government-stimulus-fueled pick-up in infrastructure investment and a recovery in exports are the key drivers behind the growth resurgence. However, with the impact of the stimulus beginning to fade and external demand lackluster, the mainland economy may struggle to maintain its momentum, say China watchers.

"We believe GDP growth will peak in the third quarter...The economic recovery is not a healthy one, in our view, and will only exacerbate existing economic imbalances, which goes against the government's long-term objectives," Zhiwei Zhang, chief China economist at Nomura wrote in a note this week. He sees growth slowing to 7.5 percent in the fourth quarter on year.

Peter Parks | AFP | Getty Images

Recent economic indicators for September including exports, which unexpectedly contracted 0.3 percent on-year, and electricity consumption growth, which slowed to 10.4 percent on-year from 13.7 percent in August, indicate that momentum may have already started to lose steam, say economists.

Industrial production, fixed-asset investment and retail sales data, also set to be published on Friday, will provide further insight on the state of the economy.

Factory output growth is expected to have moderated to 10.1 percent on-year, while fixed-asset investment is forecast to have grown 20.3 percent in the first nine months of 2013 from a year earlier, unchanged from gains in the first eight months.

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"Entering September, the economy is already losing momentum. The growth acceleration will stop fairly soon," said Wei Yao, China economist at Societe Generale.

Yao says deleveraging in the shadow banking sector will dampen overall credit growth in the economy, which will in turn drag on investment growth in the coming months. China's money supply growth slowed in September to 14.2 percent year-on-year from 14.7 percent.

"The latest money [supply] data supported our call that the Chinese economy is on a gradual deleveraging path. We maintain our view that the current infrastructure-led growth rebound is unlikely to last much longer," she said.

Chinese GDP will 'settle nerves'
Chinese GDP will 'settle nerves'

What pick-up?

According to a private sector survey by U.S. based-China Beige Book International, conventional wisdom that the third quarter saw renewed, strong economic expansion is "seriously flawed."

The quarterly private sector survey, which is based on interviews with over 2,000 respondents, made up of business executives across sectors and regions in the mainland found, "weakening gains in profits, revenues, wages, employment, and prices, all showing slipping growth on-quarter...certainly not the powerful expansion suggested by the consensus narrative."

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The report noted that manufacturing sector in fact saw a slowdown, contrary to the positive Purchasing Managers Index (PMI) readings in the recent months.

"[The third quarter] yielded a modest downturn in manufacturing revenue gains. New order growth slowed, at home and abroad, and business confidence slipped. These results are not catastrophic, but neither do they indicate growth is picking up," the report said.

The official Purchasing Managers' Index rose to 51.1 last month from August's 51.0. The key 50 mark separates growth from contraction.

— CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H