At long last, some signs of stability

Bloomberg reports that the Fed is now less worried about China in light of the recent upsurge of the Shanghai stock market and signs (albeit still patchy) of stabilization in the real Chinese economy. This would represent the greatest external hurdle to a long-awaited rate hike happening in December.

Bloomberg's overview of China in 3Q, as I've found out, indicates that mainstream opinion isn't nearly as gloomy as many headlines and stories suggested in August and September. Some highlights (my emphasis):

China’s economy slowed less than expected in the third quarter as a resilient service sector shrugged off the stock market crash and offset continued weakness in industry. Some will focus on the accuracy of the figures. Our GDP tracker averaged 6.6 percent in the third quarter, suggesting the official growth rate is not substantially exaggerated. Stronger credit expansion in the last few months is laying a foundation for short-term stabilization in growth — though further easing remains likely.

On the issue of data reliability:

 As ever, there will be debates about the reliability of the data and claims that the official growth rate is exaggerated. There are some puzzles in the data — for example, the acceleration in services output given the collapse in the equity market. The GDP deflator, which some analysts argue is a channel for data distortions, fell to minus 0.7 percent from 0.1 percent in the second quarter. Without that drop, real growth would have been close to 6 percent. 

That said, we don’t think any of the alternatives to the official data tell a more compelling story. Widely used proxies like electricity output say more about the health of heavy industry than the economy as a whole. We note that tax revenue — representative of the whole economy and difficult to fake — is up 5.4 percent year on year in the nine months to September. Taken together with our monthly GDP tracker’s 6.6 percent reading for the third quarter, that gives us some comfort growth isn’t substantially exaggerated.

And of course, more experts are acknowledging that it may already be a moot point just how badly China has slowed down, because the broader global economy doesn't seem to be going to hell anyway. As the Fed hike article concludes:

For the world economy, that means worries about a near-term hard landing in China may be excessive, said Leon Berkelmans, a director at the Lowy Institute for International Policy in Sydney and a former economist at the Fed and Reserve Bank of Australia.

"Even if China is extremely sick right now, the lack of spillovers could be a positive story," he said.