Chinese economy hit by crises in energy, shipping and real estate

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By Laura He, CNN Business

China’s GDP grows at slowest pace in a year as huge energy crisisdisruptions to navigation and worsening real estate crisis weigh heavily on the world’s second largest economy.

The economy grew only 4.9% in the third quarter, compared to the same period a year earlier. It’s much slower than the 7.9% increase China entered the second quarter. It is also the lowest growth rate since July to September of last year, when GDP also grew by 4.9%.

“The challenges of keeping the economy running smoothly have increased,” Fu Linghui, spokesman 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 unstable and uneven”.

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

The country is in the midst of an energy crisis that is weighing on factory output and causing power cuts in some areas. That problem was fueled by demand earlier this year for construction projects that need fossil fuels and are at odds with Beijing’s pursuit of ambitious carbon reduction targets.

Delivery delays and growing inventories have also hit smaller manufacturers in China who are now cash-strapped, leading to lost orders and production cuts.

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

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

Industrial production rose just 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 cement and steel production – 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 in the last quarter,” wrote Julian Evans-Pritchard, senior China economist at Capital Economics, in a research note, adding that “industry and construction appear to be on the cusp of a deeper slowdown”.

Slammed on three fronts

The triple threat of simultaneous crises in energy, shipping and real estate is impossible to ignore.

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

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

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

While energy prices have risen “sharply” this year, he said the crisis would be “softened” as the government implemented 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 limit carbon emissions.

Some experts agreed that the energy crisis would likely dissipate.

“We think power shortages and production curtailments will become less of an issue” later in the fourth quarter, said Louis Kuijs, head of Asian economics for Oxford Economics. “Senior politicians have started to emphasize growth and we expect them to start calling for the pursuit of climate goals on a more measured timeline.”

Long-term problems in the real estate sector

Debt issues plaguing the country’s real estate sector may be more difficult to resolve.

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

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

“It shows how quickly the real estate sector has been cooling recently,” Macquarie’s Hu wrote in a Monday note, pointing to the data. He suspects the real estate sector will be “key to watch” over the next year, and suggested trouble could be China’s biggest growth headwind in 2022.

Fearing an overheated real estate market, Beijing began to tighten the screws on the sector in the summer of 2020 by forcing developers to reduce their level of indebtedness.

And earlier this year, the government made clear it would prioritize ‘common prosperity’ and controlling house prices, which it blamed for deepening income inequality and threatening stability social.

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

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

Beijing’s crackdown on The housing sector is China’s “biggest 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 policy “U-turn” on the housing sector. Instead, the government could focus on trying to stop rampant speculation in the housing market.

“I think there could be some sort of margin adjustment on the tightening measures,” he said, while adding that the weakness in the sector “will carry over” into next year.

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

Some positives, but problems ahead

Encouraging signs have emerged, particularly in services. Retail sales rose 4.4% in September, accelerating from the 2.5% increase recorded in August.

That’s largely down to China’s efforts to contain the coronavirus, analysts at Goldman Sachs say. While the country remains largely closed to the rest of the world, its zero-tolerance approach to containing infections has prevented the virus from spreading out of control.

Goldman analysts noted in a Monday note that while lockdowns reduced retail sales growth in August, those restrictions were soon eased, contributing to a rebound.

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

Despite slowing 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 by 9.8% compared to a year ago, when the Covid-19 pandemic was taking its worst toll.

“Overall, the economy continues to recover,” said Fu, a spokesman 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 are still worried. Several companies have lowered their growth forecasts for China this year. And the country will likely need to take more steps to support growth in the coming months, Kuijs says from Oxford Economics.

He wrote that China is likely to ease some aspects of “global credit and real estate policies,” for example, and said policymakers are likely to encourage more infrastructure projects. as well as.

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

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