China's gross domestic product figures did not impress markets at first. Japan's Nikkei index ended the day sharply lower, while Chinese stocks fell slightly, immediately after the data were released and closed the session in the red.
But a closer look at the data released on Tuesday shows that things are, overall, looking up.
First, GDP growth itself may have come in at a five-year low but it still beat expectations, if just by a tiny amount. In the third quarter, Chinese growth was 7.3% year on year, the slowest pace of growth since the first quarter of 2009, but slightly ahead of expectations of 7.2%. Markets fell because this means that no further stimulus from the government or the People's Bank of China is likely for the short term. But the long-term implications are rather positive, as it means the economy has a chance to rebalance without official intervention.
Fixed asset investment growth slowed to 16.1% year to date last month from 16.5% in August. But the sectors in which investment fell are infrastructure and real estate, both areas that were overheating anyway and which the government has been trying to slow down in a controlled manner. Over the short term, this has painful implications, but over the longer term it means a healthier economy. Investment picked up at a modest pace in manufacturing, probably boosted by a revival of industrial production.
Industrial output was another pleasant surprise. It rebounded to show growth of 8% in September after August's 6.9%. The strength in industry, notes think-tank Capital Economics, was confirmed by "a particularly sharp recovery" in the growth of electricity output, which is a proxy for activity in heavy industry.
Another set of data released from China today was wage growth for the third quarter. Median income growth exceeded nominal GDP growth, which means that the average Chinese household enjoys a bigger share of the economy's expansion. "This appears to be supporting consumption," said Capital Economics.
Retail sales for September slowed to 11.6% year on year from August's 11.9% growth. But this was in nominal terms and was driven by a decrease in inflation. Disinflation, at the end of the day, leaves more money in consumers' pockets so they can go out and spend.
A large part of China's vast workforce is made up of internal migrant workers, people coming from the villages or small towns deep within the country to the big industrial centers. These people's wages are a crucial gauge of the health of the economy as they are not only a massive spending force but also actively moving in search of work and therefore an early indicator of slowdowns.
The average monthly income of migrant workers increased by 10% in the third quarter, data quoted by analysts at RBS show. That was still robust, even if it came in slightly lower than the second quarter's growth of 10.3%.
Another bit of good news is the fact that the impact on the economy of a decrease in lending is "less painful than the numbers suggest," according to RBS analysts. They point out that total social financing in the third quarter increased by less than half of the amount in the first and the second quarters. While banks' loans were higher than expected in September, loans from trusts decreased and the momentum of corporate bonds lost speed.
So, the fears that a crackdown on shadow banking would result in pronounced economic slowdown seem to have been exaggerated, at least for the time being. "Tighter regulation of shadow banking activity is likely to have brought some off-balance sheet credit back to banks' loan books, possibly cutting layers of intermediation," RBS analyst Louis Kuijs wrote in a market note.
It looks like the worst is over for China and that the government might even manage to rebalance the economy away from an investment-based growth towards a more consumption-based expansion without huge disruption. That's barring any unforeseen, black swan-type events and keeping in mind that the property sector is still a big risk for the economy, with effects that are not fully understood (or priced in).
If you are looking for ways to get exposure to China, one obvious investment would be Alibaba (BABA), the e-commerce giant that gives you direct access to the country's consumers. A proxy for that is Yahoo! (YHOO), and another gauge for how healthy the Chinese consumer is will be the web portal company's earnings, which are due to be released after the market closes today.
Over at Real Money's sister site TheStreet.com, Eric Johnson writes that institutional investors have been pouring into Chinese markets and lists a few ways in which private foreign investors can profit, too. He suggests, among other things, buying stocks of Chinese companies listed on U.S. stock exchanges, such as state-run oil giants PetroChina (PTR) and Sinopec (SHI).