Day of Reckoning for Chinese Economy

By Glenn Dyer | More Articles by Glenn Dyer

A big day today for the Chinese economy and its growth path towards the end of 2021 and into early 2022, with the release of what could be quite weak third quarter economic growth figures, plus some poor data on investment, retail sales and industrial production.

Economists think China’s quarterly growth will come in around 5.1% compared to the 7.9% annual rate in June. Quarter on quarter growth is forecast to slow to 0.4% from 1.3% in the June quarter.

If the figures come in better than forecast, watch market scepticism rise.

China got an early taste of winter in northern areas on Friday onwards, sending coal prices to new highs and putting further strains on the country’s overburdened electricity and gas sectors.

At the same time the struggling property sector continues to remind everyone it’s the second biggest worry for the economy after energy and reliability of power supplies this winter.

Reuters reported at the weekend that representatives from 10 Chinese property companies met government regulators to ask for a loosening of the current tough policy restrictions.

Reuters said the senior executives urged authorities to loosen regulations with the goals of stabilising market expectations, providing support for genuine home buyers rather than speculators and making adjustments in land prices.

Led by China Evergrande a number of Chinese property firms are facing a liquidity crunch amid weak demand and tightening regulations. Property companies have been hurt by loan caps imposed by the government in order to contain rampant borrowing.

China’s central bank broke ranks on Friday to issue an assurance that the troubled China Evergrande property developer was a one-off case.

Contagion fears intensified over the past three weeks after a surprise default by Fantasia Holdings Group Co. and a warning from Sinic Holdings that its default was imminent. That is on top of the three missed payments by China Evergrande.

The People’s Bank of China (PBOC) said in a briefing that risks to the financial system stemming from the developer’s struggles are “controllable” and unlikely to spread.

People’s Bank of China official Zou Lan told a news briefing on Friday that the central bank has asked lenders to keep credit to the real estate sector “stable and orderly.

Zou is head of the PBOC’s financial market department.

“In recent years, the company failed to manage its business well and to operate prudently amid changing market conditions,” Zou said of Evergrande, which has more than $300 billion in liabilities. “Instead it blindly expanded and diversified.”

The central bank is urging property firms and their shareholders to fulfill their debt obligations, Zou said in comments reported in local and western media.

His remarks are a sign of the growing concerns at the highest level of the Chinese government at the threat to stability in property, the wider economy and the financial system from the defaults and strains in the developer sector.

This week will see the impact of the property strains and the energy crisis appear in third quarter GDP as well as the monthly large data dump on retail sales, industrial production, investment (especially in housing) and employment.

The data will tell us a lot about the impact last month and August of renewed outbreaks of Covid, blackouts and power shortages, the misguided attempts to cut carbon emissions by forcing industry to cut output and the growing problems in property.

The weakness will be seen in services (now the largest part of the economy) with retail sales weak (thanks to falling pork prices), weak levels of investment, especially in property (because of government restrictions and mixed output results especially from the impact of the campaign to cut production and carbon emissions in a number of industries like steel, aluminium and cement manufacturing.

Moody’s economists wrote late last week that China’s strong trade performance through the month of September “adds confidence to our forecast for the country’s third-quarter GDP, estimated to hit 5.4% year on year.”

“The forecast has been subject to several downward revisions amid disappointing domestic consumption and production caused by extreme weather and a Delta-led virus outbreak. This pins our full-year forecast at 8% for 2021 and 4.8% in 2022. External demand will remain favourable heading into 2022.”

Moody’s warned though China is facing challenges on a number of fronts. These include supply chain disruptions, power shortages, elevated commodity prices pressuring downstream producers, and a build-up of credit risk in the property market.

” These challenges are behind an expected deceleration in September’s activity data dump. We look for industrial production, fixed asset investment and retail trade to all slow further in year-on-year terms,” Moody’s forecast.

Exports though remained firm in the quarter showing foreign demand for Chinese products and goods was still strong, especially in the US and that shipping and container shortages did not have that large an impact.

Imports were solid, but impacted by volatile commodity prices – especially coal, LNG, oil and other metals and some grains and those rapid rises in prices translated into cost pressures for business.

That saw producer prices surge at record pace last month, hitting an annual rate of 10.7% while consumer price costs again drifted at less than 1% a year for yet another month.

Data from the China’s National Bureau of Statistics (NBS) revealed that that producer prices topped forecasts for a rise of 10.5% and August’s shock rise of 9.5%.

It is the highest reading since the start of the NBS database in October 1996 after the index hit 10.0% in August 2008 and 10.1% the following month.

You can blame the higher reading on surging coal and gas costs plus the impact of rises in oil, petrol, diesel and the impact of higher prices for computer chips cars and other transportation.

The rise was largely driven by a 74.9% year on year rise in coal mining which was up from a 57.1% annual rise in August. That means coal costs for industry – especially power generation – has more than doubled in the space of two months.

“In September, affected by factors such as rising prices of coal and some energy-intensive industries, the price increase of industrial products continued to expand,” said NBS spokeswoman Dong Lijuan, who added that among 40 industrial sectors surveyed, 36 saw price rises.

China’s official consumer price index (CPI), meanwhile, rose by 0.7% in September from a year earlier, down from a rise of 0.8% in August, the NBS said.

That was a touch under the forecast for a rise of an unchanged 0.8%. That is way lower than American CPI which was up an annual 5.4% in September.

That’s another problem for the Chinese economy and its managers – consumer prices are easing deeper into disinflation, which means the surge in coal and other costs (such as gas) is effectively being worn by producers and not retailers and distributors of electricity and gas.

That means there is a worrying build-up of cost pressures in manufacturing and the producer sector.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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