Can China pull itself out of the economic doldrums?

BEIJING (CAIXIN GLOBAL) – China’s gross domestic product (GDP) growth is expected to slow even further in the fourth quarter, as outbreaks of Covid-19 across the country, power shortages, surging raw material prices and property jitters continue to weigh on activity, adding pressure on policymakers to do more to support the economy.

Analysts say the government will need to ease fiscal and monetary policies to prop up demand while ensuring that the measures don’t derail its efforts to curb carbon emissions and resolve long-standing problems, such as the overheated housing market and high corporate debt.

As the world’s second-largest economy ploughs through the final quarter of the year, here are five key things to watch for.

Can the slowdown in GDP growth be reversed?

The short answer is no, at least in the near term.

Analysts expect economic expansion to continue to moderate in the fourth quarter from the 4.9 per cent year-on-year pace seen in the July-September period, which was the weakest in a year.

Even so, China will still be able to achieve its full-year GDP growth target of above 6 per cent.

This is because expansion in the first half was much stronger – 18.3 per cent year on year in the first quarter and 7.9 per cent in the April-June period – owing to weak comparisons with the first half of 2020 when the country was in the grip of the coronavirus pandemic.

HSBC forecasts GDP growth for the full year of 8.3 per cent, Macquarie stands at 8.1 per cent, Nomura estimates 7.7 per cent while UBS forecasts 7.6 per cent.

China was the only major economy to expand last year, growing by just 2.3 per cent.

The less ambitious target for this year was aimed at putting greater emphasis on quality rather than quantity, giving the government room to push forward with structural reforms, continue its campaign to control the amount of debt in the economy, and make progress on meeting President Xi Jinping’s target of reaching peak carbon emissions by 2030 and carbon neutrality by 2060.

China’s regulatory whirlwind over the past year has created uncertainties for the economy, as it cracked down on monopolies and market abuse, and tightened regulation of technology and e-commerce giants, as well as that of private tutoring and education.

The government has also continued to deleverage the economy and curb financial risks by tightening controls on local government debt and the borrowings of property developers.

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Will power shortages ease?

Measures to respond to the severe shortages of coal and electricity included relaxing rules on coal production, increasing imports of the fuel, cracking down on speculation and hoarding, and raising electricity tariffs for industrial consumers.

But these measures will take time to bear fruit, according to chief China economist Wang Tao at UBS Investment Bank.

The policy responses will likely only mitigate energy shortages and resulting production cuts, not eliminate them, she said.

The power consumption needs of households will be prioritised to make sure they are not affected over the winter months, so the industrial sector, especially carbon-intensive industries, will likely continue to be affected by power shortages and restrictions on production in the fourth quarter, said Changjiang Securities’ chief economist Wu Ge.

The power shortage has spurred the government to raise the limit on how much generating companies can charge industrial users above benchmark prices so that they do not lose money.

That could help alleviate the electricity shortages, but just as important is ensuring adequate coal supplies.

Imports of the fuel have jumped year on year over the past five months, and were up 96.3 per cent in October, customs bureau data released yesterday shows. The government has also allowed old mines to reopen and accelerate approvals for expansion to boost domestic production.

Even so, State Grid Corp of China warned recently of a “tight balance” between power supply and demand that would last until spring and there could be regional power outages.

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Can China’s strong export momentum last?

China was the first country to be hit by the pandemic and the first to emerge from its grip due to the government’s stringent measures to control the spread of the virus.

Domestic manufacturers were not only able to restore production but also took market share from other exporting countries hit hard by the pandemic.

As the world’s manufacturing powerhouse, China was also the main global supplier of medical equipment and supplies needed to fight the pandemic, and benefited from the surge in demand for work-from-home products such as furniture and computers.

These factors combined led to a surge in goods exports this year, with a jump of 49 per cent year on year in dollar terms in the first quarter and 33 per cent in the nine months to September, official data show.

The trend has continued in the fourth quarter, with exports jumping 27.1 per cent year on year in October and the monthly trade surplus widening to a record US$84.5 billion (S$114 billion).

Some economists caution that the headline export numbers exaggerate the strength of overseas sales because they are nominal figures that do not take into account the impact of price increases.

Export volumes rose only 6.8 per cent year on year in October and slowed in sequential terms, analysts at Oxford Economics estimated in a note after the data release.

Economists from Nomura estimate the export price index may have increased by around 20 per cent year on year in October after a 19.5 per cent increase in September, indicating China’s real export growth in October may have been only around 7 per cent.

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Will the property sector recover?

Not in the short term, as confidence has taken a hit among home buyers, property developers, banks and bond investors, and this will take time to recover.

The effects of China’s long-running campaign to stamp out speculation in the residential property market, control prices and rein in the excessive debt of real-estate developers have become more obvious this year.

Government and industry data show sales growth has plummeted, as have investment and land acquisitions by property companies.

Property has been a key driver of the economy – the sector overall accounts for 15 to 20 per cent of GDP, according to Macquarie.

So the turmoil that hit the residential real estate market starting in the third quarter, triggered by China Evergrande Group’s debt crisis, will have an impact on domestic demand.

UBS forecasts in a Nov 9 report that new property starts and sales will decline by 15 per cent or more in the fourth quarter, while property investment will fall by 5 per cent or more.

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How will the government respond to the economic headwinds?

A reduction in interest rates is not on the cards, according to many economists, in view of high producer and consumer inflation and the government’s priority of containing financial risks.

But Capital Economics is forecasting three small cuts in the one-year medium-term lending facility between now and the end of March next year totalling 50 basis points, taking the rate down to 2.45 per cent, which will also lead to the same drop in the benchmark one-year loan prime rate to 3.35 per cent.

UBS, Capital Economics and China International Capital Corp expect another cut to the banks’ reserve requirement ratio, possibly by the end of this year, which will release more funding into the banking system.

On the fiscal front, UBS economist Wang expects China will loosen policy in the fourth quarter and early next year, with more issuance of local government bonds, faster approval of investment projects and an easing of financing curbs on local government financial vehicles.

Property is the wild card. The consensus among economists is that the government will not reverse its overall policy stance, although it will offer some support at the margin – mortgage lending rates have already started to come down and regulators have told banks to meet “reasonable credit demand” from home buyers and developers.

  • This story was first published in Caixin Global.

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