Chinese Economy Verging on Basket Case Territory

By Glenn Dyer | More Articles by Glenn Dyer

China’s economy turned ugly in the three months to September as the economy weakened sharply, barely showing any improvement at all from the stronger quarter of a year earlier.

Economic growth slowed sharply thanks to power shortages, rising energy costs, a sliding property sector, weak demand, floods, and surging inflation at the producer level as well as a continuing and widespread shortage of computer chips.

China’s National Bureau of Statistics said on Monday that GDP slowed to an annual 4.9% rate in the third quarter, compared to the same period last year.

That was markedly slower than the 7.9% annual rise in the June quarter. The annual rate was unchanged from the same quarter of 2020 when the economy was recovering from the Covid impacted lockdowns.

And on a quarter-on-quarter basis the performance looked really nasty with growth of just 0.2% since June.

That was down from the April-June period’s downwardly-revised 1.2% (from 1.3%) and is one of the weakest quarterly figures of the past decade.

September’s outcome was also less than the 5% to 5.3% forecasts from the market and was in fact the weakest outcome for a year.

The problems were especially apparent in September when a shortage of coal and LNG sparked rolling blackouts, power rationing and shortages across more than 20 provinces, including the country’s industrial powerhouse, Guangdong.

At the same time the economic disruptions were added to by two serious bouts of flooding in the quarter – the second ending the three months and continuing into this month in the north.

The economy has been battered by a serious of separate but damaging factors, hitting sectors from steel mills, power plants, aluminium smelters and thousands of other businesses across more than 20 provinces across the country – including the industrial powerhouse, Guangdong.

On top of this there’s been rising energy costs, power shortages, rationing and blackouts, not to mention the two bouts of serious flooding across the centre and the north of the country.

Surging commodity prices have not made it easier and China has at times cut imports of key products such as copper and oil because of high world prices, and it has made a series of sales of key commodities such as copper, lead, zinc and oil to try and put downward pressure on domestic prices, to little avail.

Many of the problems were added to by the ill-timed crackdown on carbon emissions by the government led by President Xi Jinping which saw industries such as steel and cement forced to cut production to limit their pollution.

The cuts are part of Xi’s policy of forcing China to move away from the old recipe of property, production and finance towards a more services based, technology driven approach.

On top of this has been the associated crackdown on a wide range of technology and service companies, from the internet, to liquor makers, to education and tutoring groups, food supply, ride share, online finance and internet giants, to gaming and TV and film mores.

But the emissions crackdown has exacerbated the impact of the energy shortage and power problems, while the computer chip shortages has hit sectors like car making and electronic goods.

The struggle by giant property developer China Evergrande (and other companies in the sector) to remain afloat amid an official crackdown on over leveraged property companies and dealings has added to the pressures on growth and confidence (see below).

Two bright spots prevented the economy from stalling entirely. Exports remained solid and retail sales were OK in the 9 months to September compared to previous levels of activity.

With growth up a massive 18.3% (annual) in the March quarter from the low period at the start of the pandemic in 2020, China is still on track to report growth reasonable growth this year, but it will be heading into 2020 with activity weak.

The first three quarters of the year saw the economy grow 9.8% (because of the giant rebound in the March quarter) China has set an economic growth target of “above 6 percent” for 2021 after the weak (thanks to Covid) 2.3% in 2020.

The International Monetary Fund projects 8% from for China this year and the Asian Development Bank 8.1%.


There were rises in sales of jewellery (20.1% vs 7.4% in August), cosmetics (3.9% vs flat reading, personal care, telecoms (22.8% vs a fall of 14.9%), home appliances (6.6% vs -5.0%) and building materials (13.3% vs 13.5%).

In contrast, sales fell for both garments (-4.8% vs -6%), and automobiles (-11.8% vs -7.4%). In the January to September period, retail sales rose16.4% compared to the same period of 2020.

That was hardly convincing and seems to be more a result of the absence of the scattered but still numerous lockdowns because of Covid Delta outbreaks in August which eased in September.

But September’s rise was faster than the 2.5% rise in August and better than the 3.3% increase a year earlier, but it was the second lowest rise of the year and the lowest since October, 2020 (4.3%).

Industrial production also missed forecasts, rising 3.1% in September, against expectations of market forecasts for a 4.5% increase.

A sharp 11% fall in steel production in September was indicative of problems in manufacturing, while car production fell by nearly 20% and coal production actually fell.

China’s coal production totalled 334.1 million tonnes in September, compared with 335.24 million tonnes in August and down 0.9% on an annual basis, according to data from the National Bureau of Statistics on Monday.

That was also a big slowdown in the quarter because output in the six months to June was up 6.9% from the first half of 2020.

Refinery throughputs in the oil sector hit 15- and 16-month lows in August and September because of the power cuts, the impact of higher oil prices and cuts to quotas by the government which is trying to control output from some smaller operators.

Fixed asset investment for the first three quarters of the year came in weaker than expected, up 7.3% from a year ago versus the expected 7.9% figure.

The urban unemployment rate in September was 4.9%. However, that for those aged 16 to 24 remained far higher, at 14.6%.


Nowhere is the confusion and damage done to Chinese industry over the past four months better illustrated than in the performance of the key property and steel industries.

Both industries – but property in particular – are important indicators of how the Chinese economy is travelling. Both showed over that period the adverse impact of the policy confusion and incompetence, weak demand, the power shortages, blackouts and badly-timed efforts to cut carbon emissions.

Both sectors are vital to Australian exports to China – especially iron ore. The weak outlook for both sectors for the next six months or more is normally not good news for the likes of BHP, Rio Tinto, Fortescue, Oz Metals and the like.

But the continuing rise in demand from the renewables sector will go a long way to offsetting that weakness in the minds of investors.

How long that lasts will depend on how quickly the problems hurting the Chinese economy can be corrected and new ones put in place without a massive loss of prestige by President Xi.

The current performance of both sectors also tells us that there will be no quick way out of the economic weakness for the wider economy because the fortunes of steel are tied to the fortunes of the property sector – which look bleak as the government of Xi Jinping attempts to force a change in behaviour among developers and put a cap on the output of heavy carbon emitting (and consuming) sectors like steel.

But for the moment – or rather until next April at the earliest -carbon is back in favour as China seeks to get its hands on as much coal (and then gas) as possible to keep the lights and home heating on and as much other activity as possible until the winter ends.

That will, in the short term, make China’s involvement in the Glasgow climate change conference look more than a bit mealy-mouthed.

But it is vital that Chinese citizens do not go cold this winter and have electricity enough to heat their homes, feed themselves, wash and keep jobs open.

Take steel – the combination of the carbon emissions cut campaign and the power cuts and rationing, plus falling demand from a sliding property and construction sector saw crude steel production plunge more than 20% year on year in September in one of the largest falls recorded for years.

The world’s top producer turned out 73.75 million tonnes of crude steel last month, down around 11% from August’s 83.24 million tonnes, according to figures from China’s National Bureau of Statistics showed on Monday.

That is down 21.2% from the 92.55 million tonnes produced in September, 2020. That was also more than a quarter lower than the record 99.5 million tonnes produced in May of this year.

Underlining the weakness of the performance (and the cause was all self-inflicted) September’s production was lower than during the pandemic in the opening three months of 2020.

But in the first nine months of the year, China produced 805.89 million tonnes of steel, up 2% on an annual basis, according to the data. That is down sharply though from the near 12% rise in the first six months of this year.


And, finally, to property.

If you had to pick one sector in the Chinese economy that is a figurative “canary in the coal mine” it is property, which is taking the full force of a significant tightening of controls by the government on activity, lending and construction practices, all seemingly without any regard of the outcome or consequences for other parts of the economy.

And the consequences could be terrible if the government loses control or overplays its hand and allows the hugely indebted ($US305 billion plus) China Evergrande development group to implode – something that would drag other poorly financed property groups with it.

At least two and perhaps three smaller developers have, like China Evergrande, either missed interest payments or defaulted on debt. China Evergrande this week returns to the centre of worries in markets when the 30-day grace period on one debt ends.

 Data out yesterday showed that China’s September new construction starts slumped for a sixth straight month – the longest run of monthly declines since 2015, as struggling developers put projects on hold in the wake of tighter regulations on borrowing.

Reuters said that new construction starts in September fell 13.54% from a year earlier, the third month of double-digit declines, according to analysis of the January-September data released by the National Bureau of Statistics on Monday.

That marks the longest downtrend since declines in March-August 2015, the last property malaise.

Property sales by floor area dropped 15.8% in September, down for a third month.

The slowdown in the sector was emphasised by the 3.5% drop in property investments by developers in September, the first monthly decline since January-February last year at the height of the pandemic and lockdowns.

In the first nine months, property investment rose 8.8% from a year earlier, slowing from 12.7% growth reported in January-July.

The problems in the sector are certainly worry authorities with China’s central bank commenting on Evergrande’s problems for a third time in a week.

This time it was Yi Gang, governor of the country’s central bank, the People’s Bank of China, who said on Sunday that the authorities will try to prevent problems at Evergrande from spreading to other real estate companies to avoid broader systemic risk.

On Friday, a central bank official said the spillover effect of Evergrande’s debt problems on the banking system was “controllable.”

Friday also saw representatives from 10 Chinese property companies met government regulators to ask for an “appropriate loosening” on policy restrictions, Reuters reported.


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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