China's GDP: is 6% enough to sustain risk rally?

By Giles Coghlan, Chief Currency Analyst at HYCM

A rock and a hard place?

So, China's GDP came in at +6.0% last week, below the 6.1% expected. Eamonn reported on it here. Ok, so the figure was a miss, but a fractional one. September's industrial production came in at 5.8% vs 4.9% expected suggesting that a rebound may be ahead. Which narrative will the market go with:

Bullish case

- Although China's GDP has slowed to 6.0%, the slowest in 27 years, a lower GDP is more in keeping with a developed country. The last time US GDP was above 6% was in 1984, when it was 7.2%). The last three years GDP growth for the US has been 2.9% , 2.4% and 1.6%. GDP growth for the UK between 2015-2017 has been 2.3%, 1.9% and 1.8%. So, a slowing GDP for China is just a normal consequence of their ascendency as an economic nation.

- Now 'Phase 1' China deal is nearly there, this will help rebound GDP and the pick up in Industrial production shows a bottom is in place.

- If China then couple their previous growth years with economic reforms and open their markets then there is more growth to come. One of the challenges for China is how to interact with Western markets in a way where they don't feel like they lose their own identity, but at the same time many in China question the communist ideology. Is it the best ideology to have? Many Chinese students have studied in the West have been exposed to critical and free thinking in Western Universities. These are two strengths of the West to think like this, and ones that China is ready to embrace. However, a strict authoritarian communist party just looks a bit crazy when you have been exposed to free critical thinking. Now, when these Chinese students return to China they won't upset the applecart, but the centre of gravity will shift. The communist ideology will lose its grip and China is ready for a new chapter. The closer it walks to free, critical thinking the greater its growth will be.

Bearish case

- Lowest GDP in 30 years
- A new downtrend is forming showing China's slowdown
- This weakness will weigh heavily on commodities (Iron Ore, Copper) and emerging markets dependent on China
- The US-China phase 1 deal is still not signed and may fold anyway.

I am persuaded by the bullish case for China and don't see the lower GDP as a massive problem, rather a consequence of its incredible growth. Near term risk will be driven now by the US-China trade deal. Get the deal done, work on phase 2 and risk should bob along quite happily.

Ok, time to chew the bamboo and let me know what you think? What's your take on China's GDP and its impact on risk/global growth?

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