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    China growth falls to below 7% for first time since 2009 but beats expectations

    GDP growth in China slowed to an annual rate of 6.9% in the third quarter of the year from 7.0% in the previous quarter. But the figure was slightly ahead of consensus estimates of 6.8%, which eased fears of a sharper slowdown. China’s economy, a leading driver of world growth, has become a major cause of concern in recent months following the stock market crash and falling property prices.

    As the government attempts to rebalance the Chinese economy, there are signs that growth is being held up by a stronger service sector just as the manufacturing sector struggles with overcapacity. Industrial production figures out today showed output slowing to 5.7% year-on-year in September, down from 6.1% the prior month and below forecasts of 6.0%. Fixed-asset investments also eased to rise by just 10.3% year-on-year – the slowest level since 2000.

    The weak industrial sector has had a major impact on commodity prices such as steel, hurting commodity exporters such as Australia and South East Asian countries. But non-commodity imports have also fallen and this has led to reduced global demand for manufactured goods and components.

    Strong domestic consumption is one of the bright spots in the economy. Retail sales were up by 10.9% in the 12 months to September, coming just above estimates of 10.8%. The service sector expanded by 8.6% annually in the third quarter, compared with 5.8% for the industrial sector.

    Hopes for further stimulus measures remain high and many analysts expect the government to further lower interest rates, which have already been cut five times since November, as well as to reduce the reserve requirement ratio. Spending on infrastructure projects has also gone up to help revive growth. But as the government struggles to meet its 7% growth target, some have cast doubt on the reliability of the official data and have turned to other indicators such as electricity production and rail freight to suggest that actual growth could be closer to 3%.

    Markets initially reacted positively to the data but excitement soon faded as uncertainties persist over the outlook for Chinese and global growth. The Australian dollar, which is regarded as a liquid proxy for China’s economy, was up by almost 1% at some point in European trading to briefly top the 0.73 handle against the greenback but later fell back to around 0.7290.

    The US dollar was also up, gaining against the yen and the euro, as a more positive outlook for China’s economy increases the likelihood that the US Federal Reserve would increase interest rates sooner rather than later. However, equities gave up earlier gains to turn negative. China’s Shanghai SE Composite index closed 0.1% lower on Monday.

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