22 October 2018
Nurses and other public-sector workers contributed to growth in the Chinese economy during the third quarter of this year. Photo: Reuters
Nurses and other public-sector workers contributed to growth in the Chinese economy during the third quarter of this year. Photo: Reuters

How nurses saved China GDP growth from margin traders

The sector breakdown of China’s data for third-quarter gross domestic product shows it was higher output from public services that rescued growth from the impact of the equity market collapse.

With growth in the financial sector continuing to outpace the rest of the economy by a wide margin, there’s a further slowdown to come.

The collapse in China’s equity market was expected to deal a blow to third-quarter financial services output.

The sector breakdown shows growth in financial value-added slowing to 16.1 percent year on year in the third quarter from 19.2 percent in the second.

Without a more detailed breakdown of the composition of the financial sector, it’s difficult to say how much the equity slump should have hit output.

However, looking at the historical relation, the drop looks smaller than expected but not markedly so.

The main offset to slower growth in financial intermediation came from “other services”, a large category that includes teachers, nurses and other public-sector workers.

Growth in output from “other services” accelerated to 9.5 percent in the third quarter from 8.7 percent in the second.

Given the large weight of “other services” in GDP, that acceleration did substantial work in preventing growth from slumping further below the government’s 7 percent target.

Higher output from public-sector workers also makes sense, given the marked acceleration in fiscal spending in the third quarter.

The sector breakdown doesn’t answer all the questions about the reliability of China’s data or the pace of growth.

Our own GDP tracker puts growth at 6.6 percent year on year in the third quarter.

However, the shifting pattern of growth suggested by the breakdown does make sense.

The equity boom has turned to bust and that has dented — but not cratered — financial sector output.

It didn’t crater because banks continue to lend and insurance firms continue to collect premiums.

Accelerating fiscal expenditure has underpinned an expansion in public-sector output, which has taken up some of the slack.

The less positive takeaway from the data is that financial sector growth still has a significant distance to fall.

A 16.1 percent growth rate is still way above the 6.9 percent expansion for the economy as a whole and the average of 9 percent for the sector from the third quarter of 2010 to the third quarter of 2014.

With the equity boom accelerating financial sector output from the fourth quarter of 2014, the base for growth in the quarters ahead will be more challenging.

China’s government will either have to accept that will take headline GDP further from its 7 percent target, or continue to ratchet up public spending in the months ahead.

The views expressed in this article are those of Tom Orlik and Fielding Chen, economists at Bloomberg Intelligence.

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