China GDP: Will Weaker Data Hurt Xi’s Ambitious Policy Agenda?

The release of China’s third-quarter economic growth estimate on Monday comes at a pivotal time for the world’s second-largest economy.

The National Bureau of Statistics gross domestic product figure and other indicators will show the first impact of two economic shocks: the debt crisis in Evergrande, one of China’s largest real estate developers, and widespread and crippling energy shortages.

President Xi Jinping’s government has done little to ease pressure on the country’s real estate sector, even though it accounts for as much as 30 percent of total economic output.

Beijing has instead used what it believes is a “window of opportunity” to discipline over-indebted real estate developers, which it sees as a serious threat to China’s financial stability.

β€œThe emphasis on deleveraging, pressure on real estate speculation and energy shortages have likely significantly affected China’s already weak growth dynamics,” said Eswar Prasad, a former head of the IMF’s China division who now works at Cornell University.

He added that Xi and Liu He, deputy prime minister and the president’s most trusted economic adviser, “seem willing to accept a clear short-term slowdown in growth as the price of greater long-term financial stability.”

Here are five things to look out for with next week’s release:

Has the Chinese economy stalled on a quarterly basis?

China’s economy grew 12.7 percent in the first half of the year compared to the same period last year, when the Covid-19 pandemic hit central Hubei province and severely disrupted economic activity across the country.

However, this big rise in headlines masked quarter-over-quarter growth of just 0.4 percent in the first three months of the year and 1.3 percent in the second quarter.

Analysts at Goldman Sachs predict that economic output in the third quarter did not grow on a quarterly basis at all. In a Sept. 28 report, they said there was also “significant uncertainty” about China’s fourth-quarter outlook because of “the government’s approach to managing Evergrande stress, the strict enforcement of environmental targets and the extent to which of policy easing”.

What was the Evergrande effect on fixed asset investment in September?

Evergrande warned on September 13 that August monthly sales had nearly halved compared to June and forecast another dismal result in September, which is normally a record month for the industry.

More broadly, property sales in the country’s 30 largest cities fell nearly a third year over year in September. That suggests September was a very weak month for fixed asset investment, which tracks spending in real estate and infrastructure. Fixed asset investment growth had already slowed from 12.6 percent year-on-year in the first half of the year to 8.9 percent in the January to August period.

Infrastructure investment growth was also consistently slower in Xi’s second term, which began in 2018, than in his first (2013-17), reflecting his administration’s concerns about debt levels in local government financing vehicles, which are the main source of infrastructure investment. finance.

How have power shortages affected industrial production?

Industrial production growth already slowed β€” up just 5.3 percent year-on-year in August compared to 8.3 percent in June β€” before the magnitude of China’s power crisis, like Evergrande’s, hit everyone from factory owners to September. economists, shocked.

The main reasons for the power shortages vary by region. They include coal shortages and rising coal prices, which have forced factories to curtail generation, as well as strict environmental and energy efficiency targets.

Larry Hu, China’s chief economist at Macquarie, noted that the country’s ministry of economic planning had taken steps to address coal shortages but had shown “no intention of changing energy consumption targets for this year” . As a result, he predicted that widespread power rationing could continue well into the fourth quarter.

Will retail sales pick up again?

Retail sales grew just 2.5 percent year-on-year in August, compared to 8.5 percent in July and well below market expectations of at least 7 percent.

If this continues, Chinese policymakers will find it even harder to restart an economy struggling with slowing investment and industrial production growth. In a recent investment note, Diana Choyleva of Enodo Economics predicted that “more pain is ahead as Xi gets even more serious about capping house price increases to tackle a major source of inequality”.

Will these challenges force Xi and his economic team to ease policy in the fourth quarter?

Prasad warned that “the government’s moves to simultaneously increase state control of the economy and the lack of clarity about its intentions towards private companies could curb longer-term growth.”

But from his crackdown on Chinese private-sector tech groups at the start of this year to his willingness to push Evergrande and other developers to the brink of insolvency, Xi has shown no signs of moderating his campaign to change China’s economic model. radically overhaul. The release of Monday’s data could be an early test of this ambitious policy agenda.

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