China’s GDP in Q3: China’s economy is weighed down by energy, maritime and real estate crises

“The challenges to keep the economy running smoothly have increased,” Fu Linghui, spokesperson for China’s National Bureau of Statistics, said at a press conference in Beijing on Monday. He said the country’s recovery from the Covid-19 pandemic is “still volatile and uneven”.

China was the only major economy to escape 2020 without falling into recession. But it has this year encountered a series of challenges that weigh heavily on growth.

The country is in the midst of an energy crisis that is reducing the output of factories and leading to blackouts in some regions. This problem was fueled by demand earlier this year for construction projects that require fossil fuels and are at odds with Beijing’s pursuit of ambitious carbon reduction targets.

Shipment delays and increased inventories have also hit small manufacturers in China who are now strapped for cash, leading to lost orders and cutbacks in production.

The real estate sector is also suffering from a government desire to curb excessive borrowing. Real estate investment is now on the decline. This is straining developers, notably Evergrande, whose debt crisis has raised concerns about the risk of contagion for the sector and the economy in general. Some other real estate companies have already indicated that they are struggling to pay off their debts.

The fallout from those headwinds was apparent in all of Monday’s data.

Industrial production rose only 3.1% last month from a year ago, the lowest rate since March 2020, when the pandemic hit the Chinese economy. Real estate-related activities, including the production of cement and steel, recorded sharp contractions. Investment in fixed assets, meanwhile, appears to have declined in September, reversing a slight gain in August, according to Goldman Sachs estimates.

“Official GDP growth slowed at a breakneck pace in the last quarter,” wrote Julian Evans-Pritchard, senior Chinese economist at Capital Economics, in a research note, adding that “industry and construction appear to be on the verge of dying. ‘a deeper slowdown “.

Slammed on three fronts

The triple threat of simultaneous crises in the energy, shipping and real estate sectors is unavoidable.

The manufacturing sector has been “hit hard” by supply chain disruptions, noted Iris Pang, chief economist for Greater China at ING Group. She pointed out in a research note on Monday that operations in some ports have been affected by the Covid outbreaks and the measures taken by authorities to contain them in the last quarter.

Meanwhile, a massive power crisis made matters worse. Larry Hu, head of the Chinese economy for the Macquarie Group, noted that the slowdown in industrial production was “more pronounced in energy-intensive sectors,” such as steel and cement.

Record inflation in Chinese factories poses another threat to supply chains

Beijing on Monday tried to allay fears about the impact of the energy crisis. Fu, spokesperson for the National Bureau of Statistics, said that “limited energy supply is only a phase and the impact on the economy is controllable.”

While energy prices have “risen sharply” this year, he said the crisis would be “eased” as the government implements measures to bring the problem under control. In early October, for example, China ordered coal mines to increase production, just months after ordering the opposite to curb carbon emissions.

Some experts agreed that the energy crisis would likely dissipate.

“We believe electricity shortages and production cuts will become less of a problem” later in the fourth quarter, said Louis Kuijs, head of Asian economics for Oxford Economics. “Senior politicians have started to focus on growth and we expect them to start calling for the pursuit of climate goals on a more measured timeframe.”

Long-term problems in the real estate industry

The debt problems plaguing the country’s real estate sector could be more difficult to resolve.

Real estate, along with related industries, accounts for up to 30% of the country’s GDP. If Evergrande, the country’s second-largest developer in terms of sales, collapsed, investors and buyers alike could be frightened. A potential wave of developer defaults could have a significant impact on growth and pose risks to financial stability.

Real estate sales, investment and construction activity are already struggling. Real estate investment fell about 4% in September compared to a year ago, after leveling off in August. Compare that to the start of this year, when those investments jumped 38% in January and February.

“This shows how quickly the real estate industry has cooled recently,” Macquarie’s Hu wrote in a note on Monday, highlighting the data. He suspected the real estate sector would be “the key to watch” over the next year, and suggested that problems could be the biggest obstacle to China’s growth in 2022.

Fearing that the real estate market was overheating, Beijing began to tighten the screws on the sector in the summer of 2020 in forcing developers to reduce their debt.

And Earlier this year, the government made it clear it would prioritize “common prosperity” and tame leaking house prices, which it accused of worsening income inequality and threatening social stability.

Evergrande experienced a major liquidity crisis. He warned last month that he could default and has since missed at least three interest payments. The corporate crisis has also disrupted global investors in recent weeks, raising concerns about a potential domino effect on China’s economy and financial markets at large.

Beijing has tried to allay fears about the real estate sector. After weeks of silence on the developer, the People’s Bank of China said on Friday that Evergrande had mismanaged its affairs but that the risks to the financial system were “controllable.”

Beijing’s crackdown on The housing sector is “China’s key long-term challenge,” said Aidan Yao, senior economist for emerging Asia at AXA Investment Managers.

He told CNN Business, however, that problems with companies like Evergrande are unlikely to cause Beijing to make a political “U-turn” on the housing sector. Instead, the government could focus on trying to stop rampant speculation in the housing market.

“I think there might be some sort of fine-tuning of the margin on the tightening measures,” he said, while adding that the weakness in the sector “would spill over” into next year.

A housing slowdown will almost certainly continue to weigh on economic growth. Oxford Economics cut its growth forecast for the fourth quarter to 3.6%. It would be the worst performance since the second quarter of 2020.

A few bright spots, but problems to come

Encouraging signs have appeared, especially in services. Retail sales rose 4.4% in September, an acceleration from the 2.5% increase in August.

This is in large part because of China’s efforts to contain the coronavirus, according to Goldman Sachs analysts. While the country remains largely closed to the rest of the world, its zero-tolerance approach to containing infections has kept the virus from spreading uncontrollably.

Goldman analysts noted in a Monday note that while the controls reduced retail sales growth in August, those restrictions were quickly relaxed, contributing to a rebound.

The Delta variant hit the Chinese economy hard.  Now a real estate crisis is looming

They said they expected consumer spending to continue to rebound in the fourth quarter, barring “major waves” of Covid-19 outbreaks.

Despite the slowdown in growth this quarter, China is also still on track to meet Beijing’s annual growth target of over 6%. For the first three quarters of 2021, GDP grew 9.8% compared to a year ago, when the Covid-19 pandemic was wreaking havoc.

“Overall, the economy continues to recover,” said Fu, spokesperson for the National Bureau of Statistics, adding that the country had “the capacity and the conditions” to achieve its development goals this year.

But many analysts remain concerned. Several companies have downgraded their growth forecasts for China this year. And the country will likely have to take more steps to support growth in the coming months, according to Kuijs from Oxford Economics.

He wrote that China is likely to relax aspects of “comprehensive credit and real estate policies”, for example, and said policymakers are likely to encourage more infrastructure projects. also.

– CNN’s Kristie Lu Stout and Sophie Jeong contributed to this article.


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