In the latest note of the Swiss private bank “Picte Wealth Management” that analyzed the slowdown in the growth of the Chinese economy in the third quarter of this year, the bank said, if the continuing threat of the Covid-19 epidemic, the difficulties faced by the real estate sector and the recent energy shortage have contributed to this slowdown, Beijing’s reorientation of its policy priorities toward sustainable growth and greater social equality explains much of the slowdown.
“In response to the sharp slowdown in growth, the Chinese government has begun to adjust some of its policies, but this may not be enough to effectively offset the current pressure on growth momentum, and even if these policies can bring long-term benefits to the Chinese economy, they may continue,” he added. in causing pain in the short term.
Providing details, the bank says, “China’s third-quarter GDP came in well below market expectations of 4.9 percent year-on-year, compared to 18.3 percent in the first quarter and 7.9 percent in the second quarter.” China’s economy expanded 9.8 percent year on year in the first three quarters of 2021. Overall, it was down from 12.6 percent in the first half.
The analysis shows that although Chinese exports continued to rise strongly, other parts of the economy slowed very sharply in the third quarter due to the continuing impact of the Covid virus and the government’s sweeping regulatory crackdown.
lack of energy
“The serious shortage of energy has weighed on the industrial sector in China, where while we were expecting some fine-tuning of policy to ease the pain in the near term, this did not happen,” he says.
The broad direction of government policy is unlikely to change, continued fiscal easing is supposed to help the industrial sector, but the pace and size of this support may not be enough to offset the headwinds the Chinese economy is facing.
He adds, “Overall, the latest data from the Chinese economy indicates that it has slowed faster than we expected – although we have been warning of downside risks to our growth forecasts – but the potential rebound in the fourth quarter may be modest, and therefore, we have decided to adjust Our forecast for China’s GDP for the whole of 2021 is to 7.7 percent from 8.7 percent.”
Slowing growth despite strong exports
A detail the bank provides based on recent data releases is that Chinese exports continued their upward trend in September, rising 28.1 per cent year on year, after an impressive 25.6 per cent rise in August. The bank attributed this growth to a strong recovery in advanced economies, especially the United States and the European Union.
However, other parts of the economy continued to slow. Industrial production in the third quarter fell 1.8 percent on a quarterly basis, compared to growth of 3.3 percent in the first quarter and 0 percent in the second quarter.
Steel production fell further in September, as a result of production restrictions imposed on carbon-intensive sectors and slowing investment in fixed assets. For example, real estate investment for the first time since February 2020 last September fell 3.7 percent year on year. Infrastructure investment also shrank in September, 6.2 percent year on year.
Manufacturing investment was the only bright spot in fixed asset investment, expanding 10.2 percent year on year. This may indicate increased capital spending by some manufacturers, in response to strong export demand.
Policy shift is a major reason for the slowdown
Since the Chinese government launched antitrust investigations against some major internet companies late last year, sweeping new policies and regulations have sent shockwaves through large parts of the Chinese economy. The government’s overall goal is to reach a more sustainable growth model, and a better balance between growth and social equality.
For example, highly leveraged real estate developers are being asked to reduce their debt, manufacturers are being asked to adhere to stricter carbon emissions standards, while internet giants have been asked to correct their anti-competitive practices and pay more attention to protecting user data.
While the new regulations could bring long-term benefits to the Chinese economy and society as a whole (if implemented well), they could cause pain in the short term, particularly in the hardest-hit sectors. So far, two sets of policies seem to have had the most direct impact on growth, deleveraging in the real estate sector and constraints on carbon emissions.
The liquidity crunch that some highly leveraged Chinese developers are currently facing is a direct result of the government’s decision to drastically limit the ability of these developers to raise new debt on their budgets. In the first nine months of the year, domestic loans available to developers shrank 8.4 per cent year on year, leading to a rapid slowdown in the real estate sector.
In terms of climate policies, activity in carbon-intensive industries has declined since the government imposed strict measures to achieve its annual target of containing energy use and carbon emissions. For example, in September, ferrous metal smelting and processing fell 9.7 percent year on year, while cement production shrank 13 percent.
The Chinese government’s push towards a green economy has also restricted coal production, which is still largely a source of energy in China. These restrictions have contributed to power outages in parts of the country and caused industry disruption.
Refine policies without detours
In response to the sharp slowdown in growth, the government has begun to adjust some of its policies, removing many restrictions on domestic coal production and increasing fuel imports. These measures should alleviate severe coal shortages in the coming months, but the bank says, “We do not expect the government to abandon its climate goals of achieving minimum carbon reduction by 2030 and carbon neutrality by 2060.”
Although bank credit available to developers remains tight, the monetary authority has relaxed regulations on mortgage approvals, resulting in a sequential rise in mortgage lending in both August and September. That is, there is some fine-tuning of the policies, but there has been no shift in the general direction of the government.
On the fiscal policy front, the pace of local government bond issuance has accelerated since the middle of the year. From the start of the year to the end of September, total bond issuance was at the level seen at the same point last year, after lagging significantly in the first half. This level provides some marginal support for infrastructure investment but will not lead to a significant year-on-year boost.
In its conclusion, the bank says, “Despite recent moves by the government to ease the downward pressure on growth momentum caused by its own policies, the adjustments may not be sufficient to fully offset the growth headwinds China is facing.”