China’s economy slows in Q3 on policy challenges

China’s economy slows in Q3 on policy challenges

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  • The slower growth was attributed to policy challenges, zero-tolerance COVID-19 measures, high base effect from last year’s third quarter, and energy shortages
  • Industrial production grew by only 3.1% year-on-year in September, hit hard by supply chain disruptions due to COVID
  •  Supply chain disruptions are expected to last as freight rates are still high and chip shortages are still a critical issue for industries
  • ING Economics revised China’s GDP downward to 4.3% year-on-year in the fourth quarter from 4.5% year-on-year

China’s gross domestic product (GDP) grew 4.9% year-on-year in the third quarter, slower than the growth of 18.3% in the first quarter and 7.9% in the second quarter, data from the National Bureau of Statistics (NBS) showed.

The cooling growth was attributed to policy challenges, zero-tolerance COVID-19 measures, high base effect from last year’s third quarter, and energy shortages.

According to ING Economics in a new article, the policy challenges involved deleveraging the real estate sector, increasing compliance in the tech sector, and a clampdown on tuition centers and the entertainment sector. There was also some policy confusion on the supply of coal to generate electricity, which paused manufacturing activities, but that is now solved, and coal-generated electricity should be normalized, it added. 

Data reflected weak overall activity, including in manufacturing and consumer spending.

Industrial production grew by only 3.1% year-on-year in September from 5.3% year-on-year in the previous month. Manufacturing was hit hard by supply chain disruptions due to COVID-19 as some port operations were hit in the third quarter of 2021, and chip shortages continued in the quarter.

Supply chain disruptions are expected to last as freight rates are still high and chip shortages are still a critical issue for industries like equipment, automobiles and telecommunication devices, ING Economics added.

Real estate development activities were slow because of the deleveraging reform in the sector, which makes it more difficult for developers to get funding to continue their projects. Construction materials recorded a contraction, pointing to contracting property construction activities in the month.

Retail sales were a bit stronger at 4.4% year-on-year in September compared with 2.5% year-on-year growth in August, but this doesn’t look to be consumption-led. Even so, the overall retail sales growth rate was still low because of central government policies that have resulted in the shutting down of things like tuition centers and that’s had a knock-on effect on spending power.

In the first three quarters, GDP expanded 9.8% year-on-year, putting the average growth for the period in the past two years at 5.2%, according to a Xinhua News report.

Consumption contributed the lion’s share to the economic growth in January-September period, while net exports contributed 19.5% to the GDP increase.

Retail sales of consumer goods increased 16.4% year-on-year in the first three quarters this year, while China’s value-added industrial output went up 11.8% in the first three quarters, and fixed-asset investment went up 7.3% year-on-year during the period.

ING Economics revised China’s GDP downward to 4.3% year-on-year in the fourth quarter from 4.5% year-on-year. It revised China GDP for the whole of 2021 to 8.9% from 8.7% after the release of third quarter data, based on the expectation of monetary easing to support growth by ensuring enough liquidity to avoid spikes in interest rates.

“If there is no easing in monetary policy in the quarter, we should expect GDP growth down even further,” it said.

Photo by Hanny Naibaho

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