China’s economy continues to slow, shaken by real estate and energy
The steel mills suffered power cuts. Computer chip shortages have slowed automobile production. Distressed real estate companies bought less building materials. The floods disrupted business in north-central China.
All of this has wreaked havoc on the Chinese economy, a key engine of global growth.
The National Bureau of Statistics said on Monday that China’s economy grew 4.9 percent in the third quarter compared to the same period last year; the period was significantly slower than the 7.9% increase in the previous quarter. Industrial production, the pillar of Chinese growth, fell sharply, especially in September, posting its worst performance since the early days of the pandemic.
Two bright spots kept the economy from stagnating. Exports remained strong. And families, especially the more prosperous, started spending money again on restaurant meals and other services in September, as China once again succeeded in quelling small outbreaks of the coronavirus. Retail sales increased 4.4% in September from the previous year.
Chinese officials are showing signs of concern, although they have so far refrained from triggering a big economic stimulus.
“The current uncertainties in the international environment are increasing and the national economic recovery is still unstable and uneven,” said Fu Linghui, spokesperson for the National Bureau of Statistics.
The government’s own efforts, however, are among the current economic challenges.
In recent months, the government has launched a series of measures to tackle income inequality and tame businesses, in part with the aim of protecting the health of the economy. But these efforts, including penalizing tech companies and discouraging real estate speculation, have also weighed on growth in the current quarter.
The government had also imposed limits on energy use as part of a broader response to concerns about climate change. Now electricity shortages are hurting industry and the country is rushing to burn more coal.
âThe economy is slowing down,â said Yang Qingjun, owner of a local grocery store in an aging industrial district of shoe factories in Dongguan, near Hong Kong. The power cuts have prompted neighboring factories to scale back operations and eliminate paid overtime. Local workers live more frugally.
âMoney is hard to come by,â Yang said.
Trying to solve the real estate issue
Urbanization was once a great engine of growth for China. The country has built spacious apartments in modern skyscrapers for hundreds of millions of people, with China producing as much steel and cement as the rest of the world combined, if not more.
Today, real estate, especially the debt accumulated by developers and home buyers, poses a major threat to growth. The country’s largest developer, China Evergrande Group, faces a severe cash shortage that is already spilling over to the economy.
Construction has come to a standstill on some of the company’s 800 projects as suppliers wait to be paid. Several small developers had to scramble to meet the obligations payments.
This could create a vicious cycle for the housing market. The worry is that developers can throw large numbers of unsold apartments onto the market, keeping buyers on the sidelines as they watch to see how far prices can drop.
âSome developers have encountered certain difficulties, which can further affect the mood and confidence of buyers, causing everyone to postpone buying a home,â said Ning Zhang, senior economist at UBS.
The fate of Evergrande has broader significance for the long-term health of the economy.
Officials want to send the message that bond buyers and other investors should be more wary of lending money to indebted companies like Evergrande and that they shouldn’t assume the government will always be there to bail them out. But authorities must also ensure that suppliers, builders, home buyers and other groups are not severely financially burned.
These groups “will be more united than bondholders, that’s for sure,” predicted David Yu, professor of finance at the Shanghai campus of New York University.
Addressing the difficulties of heavy industry
As power shortages have spread across eastern China in recent weeks, regulators have cut power to energy-hungry operations like chemical plants and steel plants to avoid leaving households in the dark. It was a double whammy for industrial production, which was also hit by weak construction.
Industrial production in September rose only 3.1% from the previous year, the lowest since March of last year, when the city of Wuhan was still closed due to the pandemic.
“The power cuts are to some extent more worrying than the Evergrande crisis,” said Sara Hsu, visiting researcher at Fudan University in Shanghai.
The Energy Bureau of Zhejiang Province, a heavily industrialized region on the Chinese coast, cut electricity this fall for eight energy-intensive industries that transform raw materials into industrial materials like steel, cement and products. chemical. Together, they consume almost half of the province’s electricity, but only represent an eighth of its economic output.
Cutting power to these industries risks creating shortages of industrial materials, which could spill over into supply chains.
Assembly plants in industries that use less electricity, such as automobile manufacturing, have not faced the same demands for power outages. But they face other challenges.
The coronavirus outbreaks in Southeast Asia have cut off the supply of some auto parts. There is also a global shortage of semiconductors, an essential component of cars.
Volkswagen, the market leader in China, said on Friday that production was on the decline as the company faced a shortage of chips and other supply chain issues. The company does not have enough cars to fill customer and dealer orders, creating a backlog.
âOur priority is to reduce our order backlog,â said Stephan WÃ¶llenstein, CEO of Volkswagen’s China division.
Finding strength in exports
For months, economists have been making the same prediction: China’s rapid export growth cannot last.
The economists were wrong.
Chinese exports continued to climb in the third quarter and ended strong, up 28.1% in September from the same month last year. China posted its third-highest monthly trade surplus on record last month.
China has essentially maintained its strength in exports since its economy emerged from the pandemic in the spring of last year. While much of the world has curled up in their homes, families have splurged on consumer electronics, furniture, clothing and other goods that China manufactures in abundance.
The export boom, however, creates another source of tension between the United States and China.
Katherine Tai, the United States’ trade representative, suggested in a speech two weeks ago that China’s export prowess was in part the result of subsidies and other unfair practices. âFor too long, China’s lack of adherence to global trade standards has undermined the prosperity of Americans and others around the world,â she said.
But Chinese officials and experts argue that the country’s success is the result of a strong work ethic and substantial and substantial investment in the manufacturing sector. They are quick to point out that by firmly controlling the pandemic in a matter of weeks at the start of last year, China was able to quickly reopen its factories and offices.
âWe have very strong supply, but weak demand,â said Tu Xinquan, executive dean of the China Institute for World Trade Organization Studies at Beijing University of International Trade and Technology. âSo companies have to export. “