China's GDP growth in the third quarter was higher than expected as retail sales were exceptionally strong in September.

The 9.6 percent year-on-year (YoY) growth was slightly higher than the market consensus of a 9.5 percent expansion. Higher-than-expected growth in consumption was probably the biggest contributor to the uptick in GDP. Our GDP growth forecast for the fourth quarter remains unchanged at 8.8 percent, which points to a very soft landing.

Retail sales logged impressive 18.8 percent YoY growth in September. Retail sales will likely remain strong in October in light of robust sales during the golden week national holidays, and greater purchasing power due to increasing wages and expectations of increased inflation.

Urban income jumped 10.8 percent YoY in the third quarter as the country's policy focus has shifted towards domestic consumption and strong wage growth, providing added buoyancy to the consumer sector, which has been doing well over the past few weeks.

Solid economic growth in the third quarter was also due to the still relatively strong growth in investment and net exports during the period.

Fixed-asset investment (FAI) and industrial output grew 24.5 percent and 13.3 percent YoY, respectively, in September, slightly lower than our forecast of 24.8 percent and 14.2 percent.

FAI and industrial output growth will likely continue to moderate, reflecting the effects of plant closures stemming from new emission standards enacted in September. While property investment may slow, infrastructure and industrial investments supported by the government - especially new strategic industries - will pick up, leading to moderate but solid FAI growth, at 22.0 percent YoY in the fourth quarter of 2010.

Along with solid economic growth, however, the country's inflation also inched up as well. Consumer prices grew 3.6 percent YoY in September, in line with our estimate, while producer prices rose 4.3 percent YoY, higher than our estimate of a 4.0 percent rise.

Based on the assumption of stabilizing food prices over the remainder of 2010, the country's consumer price index (CPI) is believed to have peaked in September and will remain flat in October. Do not be surprised to see a dip in CPI in November and December. However, a CPI rise is anticipated in the first quarter of 2011 due to the lower comparative base in the previous year and an expected rise in international commodity prices that could trigger further hikes in interest rates and the reserve requirement ratio (RRR) during the period.

Insurers will benefit from the initial rate hikes. At the beginning of the rate-hike cycle, life insurers usually record surging equity investment returns, due to fast economic growth alongside the uptrend in the stock market.

Based on data from 2000, the Chinese stock market reacted positively to deposit rate increases. Despite the recent rate hike, we believe strong economic performance and abundant liquidity will continue to boost overall market sentiment.

Meanwhile, energy and coal mining companies will also benefit from the strong economy and an expected cold winter.

The author is an associate director and economist at CCB International Securities Ltd. The opinions expressed here are entirely his own.

(HK Edition 10/27/2010 page2)