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Short of Expectations

China’s economic growth will climb back slightly in Q4 over Q3, mainly driven by exports, infrastructure and manufacturing investment, economists say

By Zhong Zhengsheng , Zhang Lu Updated Jan.1

A worker at Shuanghong Textile Corporation in Qutang Town, Hai’an City, Jiangsu Province, July 15, 2021

China’s Q3 GDP grew by 4.9 percent year-on-year, missing market expectations of around 5.5 percent, already a conservative forecast given the impact of the debt crisis caused by Evergrande, one of the largest property developers in China which still holds a massive amount of debt, and the country’s controls on energy consumption to deal with climate change.  

In Q3, China’s seasonally adjusted annualized GDP dropped to 0.8 percent from Q2’s 4.9 percent, almost the same level as Q1 when the government discouraged travel during the Spring Festival holiday, an annual period of big spending, due to the coronavirus pandemic. The Q3 economy fell under pressure from both the pandemic and national policies.  

Except for investment in the manufacturing sector, all major economic growth indicators fell in Q3. Industrial production, including industrial added value and export delivery value, was less affected. Its average two-year growth rate still surpassed that of 2019, showing exports were robust in driving growth. Two-year average growth in infrastructure and real estate investment declined by 1.5 percent and 1.1 percent. This indicates that lagging financial support from the central government in the first half of the year, including slowed issuance of local government special bonds for funding infrastructure projects, as well as tightened supervision over local government debts, strengthened regulation over the property sector and the risks exposed by real estate companies, all impacted the two traditional forces of maintaining stable growth.  

Besides, the average two-year growth of personal disposable income per capita fell while average median income grew too little. With the gap between personal disposable income and expenditure dwindling, stimulating consumption will be a long-term challenge.  

Double Whammy 
Aside from sporadic pandemic outbreaks and heavy floods in some regions, the unexpectedly rapid contraction of the property market compounded by the Evergrande debt crisis and the rationing of electric power against the background of energy consumption controls are the main reasons to explain slow Q3 growth.  

Fixed asset investment rose 7.3 percent year-on-year in the first three quarters. However, average two-year growth was 3.8 percent, a drop of 0.6 percent from the first half of 2021, mainly dragged down by investment in the property sector, the average two-year growth of which decreased by 1 percentage point over the first half of the year.  

Sources of capital for the property sector have generally tightened under the impact of Evergrande’s debt crisis, further affecting investment in the sector. In September, average two-year growth of financing sources for real estate development dropped from August’s 5.1 percent to 4.3 percent. Specifically, development loans sank sharply and growth of individual housing mortgage loans further slowed while self-raised funds (including bonds) grew only slightly. Down payments and prepayments also fell sharply, with their average two-year growth rate dropping to 1.7 percent from 12.8 percent in August.  

The Evergrande fiasco has boosted expectations of falling house prices among potential homebuyers, which has led to a decrease in real estate sales. This will further reduce sources of capital for developing property. In September, average two-year growth of total floor area sold dropped to -3.5 percent from -2 percent. Total floor area of new housing construction, under-construction and finished housing declined considerably in September.  

Meanwhile, the second round of centralized land supply (a policy started in 22 major cities in April to stabilize land prices) was met with less-than-expected enthusiasm from property developers. This saw land supplies in 100 cities decrease to a total of 420 million square kilometers between January and September as many local governments restricted the amount of available land, a record low since the same period in 2017. The contraction in land supply will have a more profound influence over follow-up investment in the sector.  

At the end of September, the People’s Bank of China and China Banking and Insurance Regulatory Commission told major banks to keep issuing loans to maintain the stable and healthy development of the property market. This timely guidance is important to ensure that China’s economy gets through the cyclical fluctuation smoothly.  

The dual control policy, targeted at emissions control which limits energy consumption and intensity, is also holding back overall economic growth. In Q2, market expectations for limited crude steel production caused a surge in China’s rebar prices and stirred fierce discussions over possible long-term price increases for bulk commodities. Then the State Council put forward a series of policies guaranteeing steady supply and stabilizing prices in an attempt to cool expectations over rising prices for industrial goods. But these policies likely failed to achieve the desired effect in Q3. In addition, some places that had not yet met their energy consumption targets hurried to reach them with stricter controls. As a result, some high-energy consuming industries had to absorb the blow and limit production at short notice.  

In September, among the industrial products affected by energy consumption controls, only power output rebounded a bit from its low in August. The production of crude steel, cement, non-ferrous metals and coke continued to fall. The growth of raw coal output dropped again after a rebound the previous month. This not only shows the limited effectiveness of policies for guaranteeing supply and stabilizing prices, but also that the dual control policy is a heavy restraint on high-energy consumption industries.  

Picking Up 
China expects its economy to climb back a bit in Q4, which would provide more of a buffer for the cross-economic cycle adjustment. The average two-year growth rate in Q4 should rise above 5 percent. Robust exports and investment in infrastructure and manufacturing, which are expected to rise in Q4, will help achieve that figure. But while property sector investment adjustment continues and promoting consumption becomes a long-term challenge, the uptick likely will be unremarkable.  

Investment in the manufacturing sector has maintained an upward trend in Q3 thanks to better-than-expected exports and effective monetary policies to increase medium- and long-term loans for manufacturing and support for the development of innovative small and medium-sized enterprises in fields where China is relatively weak. The government will strike a better balance between energy consumption control and economic growth. This, together with a potential improvement in Sino-US ties and continued favorable fiscal and monetary policies for downstream manufacturers, which are the weak links in China’s economy, will keep investment in manufacturing growing steadily in Q4.  

As for infrastructure, while investment slowdown has a lot to do with the slowed pace of financial support issuances in Q1 2021, it is believed investment in this sector will climb back steadily in Q4 through the accelerated launch of major projects and issuance of local government special bonds to compete the annual quota. 
Officials from the National Development and Reform Commission and the National Bureau of Statistics said in September that infrastructure investment will gradually increase as major projects listed in the 14th Five-Year Plan are launched. Entering Q4, many provinces including Henan, Hunan and Sichuan already started major projects with combined investment totaling in the trillions of yuan. In 2021, the number of major projects planned in 15 provinces increased by 16.5 percent over the last year while in 18 provinces, annual planned investment for major projects rose by 12.7 percent over 2020. The quick starts to these projects will considerably boost investment in infrastructure.  

Besides, local government special bonds worth 1.11 trillion yuan (US$173.5b) remain to be issued in Q4, 864.8 billion yuan (US$135b) more than Q4 of 2020. If 60 percent of the remaining special bonds flow to infrastructure-related fields like the rest of the year’s special bonds did, investment in infrastructure will increase 518.9 billion yuan (US$81.1b) over the same period of 2020, or 2.76 percentage points in investment growth.  

Until now, China’s continued robust exports are related to the cyclical fluctuations from the coronavirus pandemic that keeps disturbing the global economy. On the one hand, supply chains in developed countries like the UK and the US have not recovered as expected, while supply chains in countries in Southeast Asia, which previously had success with pandemic controls, were disrupted again after coronavirus variants emerged. Some underdeveloped countries are also slower in recovering their supply chains due to insufficient vaccinations. Against this backdrop, China’s supply chain showed its advantages. Meanwhile, the US, which has sustained global demand in the post-pandemic era, managed to maintain strong economic momentum stimulated by the Federal Reserve’s longer-than-expected asset purchases and strong fiscal stimulus. This has all contributed to China’s resilient exports, which may become the biggest stabilizer for China’s economy in Q4 and even beyond.