World Economy

China logs best growth so far this year

China Q3 GDP: Breaking down the numbers
China Q3 GDP: Breaking down the numbers

China's gross domestic product (GDP) rose 7.8 percent on year in the third quarter, the National Bureau of Statistics reported on Friday, up from 7.5 percent in the second quarter and in line with expectations.

"The uptick in growth reflects both better exports and solid domestic demand, although the easing of industrial output growth in September indicates that the recovery is tepid," said Louis Kuijs, chief China economist at RBS.

Industrial output growth moderated to 10.2 percent on year in September, compared with 10.4 percent in August. Still, Kuijs remains upbeat on his outlook for the world's second-largest economy.

"We expect global demand momentum to pick up as the economic upturn in the U.S. and Europe takes hold and see this as key to our growth projection for China," he said, forecasting full-year growth of 7.7 percent for 2013, and 8.2 percent in 2014.

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"Against this more constructive global backdrop, and with domestic demand momentum remaining solid, we expect GDP growth to be above the government's 'bottom line' in 2014, thus alleviating pressures to stimulate the economy," he added. Earlier this year, Premier Li Keqiang identified 7 percent as the "bottom line" for growth, local media reported, saying that this this threshold must not be breached.

With the impact of government stimulus fading, many are questioning whether growth levels posted in the third quarter will be sustainable. In late-July, Beijing unveiled a package of measures to boost the economy, which included eliminating taxes on small businesses, reducing costs for exporters and lining up funds for the construction of railways.

According to Ting Lu, chief China economist at Bank of America Merrill Lynch, on a quarterly basis, growth likely peaked in the July-to-September period. In the third quarter, growth rose 2.2 percent on quarter, up from 1.9 percent in the previous three months.

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However, in year-on-year terms, he notes that growth could rebound again, to around 7.8-8.0 percent, in the first half of 2014 on a low comparison base.

Tomohiro Ohsumi | Bloomberg | Getty Images

Raymond Yeung, senior economist at ANZ believes it's too early to conclude whether economic expansion in the mainland has peaked.

"We expect a slowdown in the fourth quarter, but it's too premature to conclude a decline of growth momentum. The Third Plenary Session is coming up in November - while we don't expect any major stimulus to expand growth, they are undergoing reforms that will help China growth in a more sustainable manner," he said.

Yeung, however, notes there are two main risks that lie ahead for the mainland economy: tight monetary policy and a strong yuan.

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With credit growth remaining robust in the recent months, the People's Bank of China could tighten liquidity if credit expands in an undesirable manner, he said. On the currency front, renewed strength in the yuan could hurt the country's export competitiveness and dampen some of the growth momentum.

Modest declines in other economic indicators released on Friday could add to uncertainty. Fixed asset investment growth softened to 20.2 percent on year in the first nine months of 2013, from 20.3 percent in the first eight months of the year. Retail sales growth, meantime, edged down to 13.3 percent on year, from 13.4 percent in the previous month.

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