China’s economy is headed for a slowdown. Power shortages, crackdowns on property speculation and a zero-tolerance covid-19 strategy is leading some to believe that the rebound from the virus-induced recession and lockdown is losing steam. The latest data show that China grew 4.9% in the July-September quarter from a year earlier, down from 8% in the previous quarter. Below the typical 7% has averaged over the last decade, China is now facing a number of difficult decisions.
First off it has a debt problem. According to Quartz, non-financial corporate debt-to-gdp in China was at 159%, higher than Japan’s and nearly twice that of the United States. Debt may drive growth, but it has also led some sectors to become overleveraged. One of them being property companies. That along with steel and cement production account for as much as 25% of gross domestic product. A recent crackdown on the property sector to rein in its debt and lower home prices for citizens has revealed widespread problems within the market. Some companies have defaulted, some are at risk of defaulting. China Evergrande Group, one of the biggest ones out there owes more than $300bn and nearly defaulted on one of its bonds. A number of its projects have been halted since troubles began in the last few months. There is also fear that the property sector may bring down connected banks (some companies have considerable stakes in private ones) or ones who simply lent to them. New construction plunged 33% year-on-year in October. There was a rare decline in new home prices and resale values as home sales tumbled 22% (year-on-year) in October. Two points I’d like to make is that if these property developers fail, it could raise prices from less supply. Or if a property tax were introduced (the government has started pilot projects), it could slowdown building because people can’t afford to invest in a new property (most of which are pre-sold). Either way it would negatively affect the country’s GDP and global GDP. If China decides to keep failing companies afloat it may help stability but may also prove deadly overtime.
China has also reported it might be at risk of power shortages because of the unavailability of coal and natural gas. Steel output has hit a 4-year low, according to Argus Media. Cement production is losing steam, although not quite as bad as steel. Higher raw materials prices are now starting to make their way into consumer prices. China’s factory gate inflation hit a 26-year high in October at 13.5% higher than a year earlier (the producer price index). The consumer price index rose 1.5% in October year-on-year, compared to a 0.7% rise in September.
One last point is that China is undergoing a zero-tolerance covid-19 policy. A recent example is after one person tested positive, more than 80,000 people were tested within 800 meters of that person. With large numbers of people going into 2-week quarantines in response to positive cases, it might be taking a toll on the economy and I don’t think its sustainable into the future.
Sources: Bloomberg, Economist, BBC, Reuters