ccording to data released by the National Bureau of Statistics (NBS) on October 18, China’s GDP grew by 4.9 percent in the third quarter. The lower-than-expected performance is believed largely due to a power crunch that dampened manufacturing, as well as the cooling real estate sector, which was exacerbated by the debt crisis at Chinese property giant Evergrande.
The figure is far below the 18.3 percent growth recorded in the first quarter and 7.9 percent growth in the second quarter, and economists diverge on the prospects for China’s economic growth in the fourth quarter and in 2022.
While some point to a recordhigh balance of trade and believe that China’s economy will soon return to rapid growth, others are more pessimistic about the country’s economic prospects in the rest of 2021 through 2022.
According to the median estimate in the latest survey among economists conducted by Bloomberg, China’s GDP growth rate will likely be 3.5 percent in the fourth quarter and 5.3 percent in 2022, considerably lower than earlier estimates, and for good reason.
In October, the official manufacturing Purchasing Managers’ Index came in at 49.2, falling below the 50 level that separates expansion from contraction. In the meantime, inflation appears to be on the rise. According to data released by the NBS on November 10, China’s Production Price Index (PPI) jumped 13.5 percent in October from last year, while the Consumer Price Index increased by 1.5 percent from a year ago, a jump of 0.7 percent from September.
While some analysts believe the jump in PPI is likely temporary, mainly caused by the “passthrough” effect of the recent power crunch, others warn that higher raw material prices around the globe in the upstream could spread to consumer goods in the downstream in the coming months.
Some economists warn these are early signs of stagflation, which refers to simultaneous economic stagnation and rising inflation. The Chinese government still has plenty left in the fiscal toolbox to deal with the situation, and some have urged the government to adopt a more liberal fiscal and monetary policy to boost the economy by increasing spending and interest rates.
But China will inevitably face a dilemma if it follows through. By adopting an expansive fiscal policy, it would again lead to increased debt, an issue the authorities have been trying very hard to reign in. Increasing interest rates may help in the short term, but as the US and other developed countries are poised to increase their interest rates in the near future, it could result in an exodus of capital.
The real risk for China’s economy is that sectors that have been driving China’s economic growth are losing steam. In the past couple of years, China has slowed infrastructure investment to control the debt level that poses a systemic threat to financial stability. With a focus on the wealth gap and social justice, the once-booming real estate sector is also under tight control.
In the meantime, domestic consumption, a major driving force of China’s growth, was hit hard in the global pandemic. While strong global demand for Chinese goods led to record-high exports, providing a major boost to the manufacturing sector, higher costs and power rationing led to new problems. As global production will recover, the long-term future for the manufacturing sector is full of uncertainties.
With these challenges, China needs to tread very carefully in its policy choices. In the meantime, it needs to search for new sources of growth to secure the country’s long-term economic sustainability.