From the Knowledge@Wharton today blog.

China’s economy may be bottoming out in the face of a weak third-quarter GDP growth rate of 7.4%. It was the seventh straight quarterly decline. Although this and some other recently released indicators look gloomy, they have been partially offset by more positive economic news, all of which suggests that the hoped-for soft landing for China’s economy may be underway.

But for the Chinese economy to revive in a sustainable way, the household consumption portion of GDP “has to reverse course and start going north,” says Wharton management professor Marshall W. Meyer. Given China’s stage of development, “household consumption is extremely low, about 34%. Neither exports, given the parlous state of the EU and, to some extent, the U.S., nor capital formation, given there has been so much of it, can provide the path to sustainable growth at this point.”

China has relied on investment activity to grow more than any economy in modern history. The country’s disappointing third-quarter numbers were foreshadowed earlier in the month when the World Bank cut its growth forecast announced just five months ago from 8.2% to 7.7% for all of 2012. Still, the Bank now projects GDP growth next year will tick upward to 8.1%, albeit a bit below its May forecast of 8.6%. Holding economic growth above 8% will be possible next year because of additional liquidity injections and higher spending by the government, World Bank economists say.

Local Chinese governments have been spending heavily to grow local industry. Various reports note that some 7 trillion yuan in spending has been set loose since July.

“When you throw a trillion dollars into the Chinese economy something is bound to happen,” says Meyer. “Whether it’s a good thing is another matter.”

Already there are signs that, despite the third-quarter’s overall letdown from the second quarter’s growth rate of 7.6%, other indicators are starting to turn around. For example, China also reported this week that exports unexpectedly jumped 9.9% in September compared with a year ago. There were additional reports that retail sales, industrial production and investment all rose toward the end of the quarterly reporting period, which prevented the numbers from deteriorating even further.

But as Meyer suggests, the short-term challenge to China’s economy seems to be one of stopping the bleeding rather than offering hope of resuming the robust growth of recent years. As he notes, the Baltic Dry Index (a measure of prices for shipping basic materials and commodities) is still far below its all-time high in May 2008, and HSBC’s China purchasing managers index “was pretty low, 47.9, at the end of September.” (A number below 50 typically suggests economic contraction, while a number above 50 suggests expansion.) The August consumer confidence level, meantime, was below that of August 2011.

The World Bank also cut its forecast for the whole of East Asia this week from 7.6% to 7.2%, acknowledging the drag China’s economy is exerting on the region. That outlook marked the lowest level of GDP there in more than 10 years.

This post was previously posted in Knowledge@Wharton today blog: China’s Third Quarter Turns Down — Again