China’s GDP growth slows to 5-year low, but that’s OK

Two cleaners have a rest on a bench at the Bund before the Huangpu River and the skyline of the Lujiazui Financial District in Shanghai on July 23, 2014. Chinese growth accelerated to a forecast-beating 7.5 percent in the second quarter, official data showed on July 16, as government stimulus provided a much-needed boost to the world's second-largest economy. AFP PHOTO / JOHANNES EISELE (Photo credit should read JOHANNES EISELE/AFP/Getty Images)
Photograph by Johannes Eisele — AFP/Getty Images

China’s gross domestic product growth fell to 7.3% in the third quarter, a nice surprise for analysts expecting the figure to be 7.2% but still the slowest rate since the depths of the global financial crisis in 2009.

The news sent Asian stocks lower on Monday, but not for the reason you might expect. Analysts said traders were likely selling because the better-than-expected GDP figure, albeit low historically, dims the prospects for a large government stimulus in China. In other words, the GDP number was good news for China in the long-term.

“Beijing now seems inclined to accept the growth slowdown, and focus more on getting financial risks under control,” wrote Chen Long of Gavekal Dragonomics in Hong Kong.

Advisors and economists have been hoping for years China would mend its massive debts and bad loans after the government’s wasteful $600 billion response to the financial crisis in 2009. Instead, that initial boost was followed by a variety of stimulus measures pumping money into the system at the earliest hint of a slowdown. As late as this spring, the government unveiled spending measures to boost the economy, from low-income housing development to additional railway spending. Beijing now looks more inclined to accept lower growth as the inevitable result of trimming leverage and enacting reforms.

In China, where a protracted housing downturn is lopping off 1.4 percentage points from GDP growth this year, according to estimates by Nomura, it’s also been more difficult than before to give a jolt to the system. “The reduced efficacy of policy easing may be related to the powerful headwinds coming from the property market correction, the overcapacity 
in many upstream industries and an over-leveraged corporate sector,” Nomura economists said in a note to clients Tuesday.

China allowing GDP growth to slid a little—the country’s target growth rate for this year is 7.5%—shouldn’t be a big surprise. Earlier this year, when Premier Li Keqiang released the target figure, other officials almost immediately said it would be just fine if China missed it. Finance Minister Lou Jiwei told reporters back then that 7.2% growth would be enough to create jobs and control inflation.

This month China’s government again indicated that lower growth is part of China’s near-term future. One of the top two government think tanks, the Chinese Academy of Social Sciences, which has strong influence on policy, estimated that GDP growth would hit 7.3% this year and just 7% in 2015—a signal that China may be content with lower growth if it helps shore up the country’s finances suffering from big local government debts and low-returning stimulus projects.

Lower GDP targets allow local Chinese governments more latitude to follow through on reforms, such as those targeting heavy-polluting industries responsible for the country’s costly and embarrassing air pollution. At the same time, they take some gloss off the country in the eyes of investors: the Conference Board, a research group, said on Monday China’s GDP growth may fall to 3.9% in 2020-2025, a much more pessimistic forecast than other researchers’, but one that reflects growing thinking that growth in the world’s second largest economy is bound for big-time slowdowns.

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