China's economy has slowed faster than expected, posting disappointing growth of 4.9% in the third quarter. Power outages across the country due to a shortage of coal exacerbated problems brought on by Beijing's "zero COVID" policy, which leads to snap lockdowns whenever cases emerge. Flagging global demand is also affecting production.
You can't produce things when you can't turn on the lights, not to mention the factory equipment. Rolling power cuts have disrupted the supply chain across the manufacturing sector and will be felt in the months to come. Raw material costs in general have surged due to transport and logistical problems.
Central China also experienced widespread flooding in July and August. Record rains pounded Henan Province in July while another storm this month hit northern Shanxi Province, the country's largest location for coal production, accounting for around one-quarter of domestic coal output.
The disappointing numbers sent markets across Asia lower. Economists had forecast third-quarter growth of 5.0% in a Bloomberg poll and 5.2% in a poll by Reuters. The third-quarter growth figure is exactly the same as the third quarter of 2020, indicating that any bounce back is over from the lows of China's pandemic, which produced a record quarterly decline of 6.8% in the first quarter of 2020.
The CSI 300 of the largest mainland-listed companies fell at the open and closed down 1.2%, with the Chinese yuan also losing ground. In Hong Kong, the Hang Seng Index dropped 0.6% at the open but reclaimed ground in the afternoon and closed up 0.3%.
Japanese stocks sank 0.2%, with sympathy selling across north Asia pushing the Korean market down 0.3% and Taiwan 0.5% lower. But Southeast Asian shares advanced.
The Chinese central government admits the nation faces a "complicated and severe environment" both at home and abroad. Buyers have evaporated from the housing market, the largest private-sector industry in China. That's due to credit concerns precipitated by the crisis at China Evergrande (HK:3333 and EGRNF), formerly the country's largest developer by sales, which is staggering under its US$305 billion debt burden. A mounting list of developers is reporting problems paying interest on bonds.
China's current pace of growth is the slowest bar the pandemic dip since 1990 -- basically, since the modern economy began. Beijing is reluctant to inject stimulus into an economy it is attempting to reform, but the pressure on the central government to instill confidence is increasing.
China was the first major economy to emerge from the pandemic after imposing extremely harsh lockdown conditions that contained the virus. It successfully got its factories back in action quickly, sometimes by government edict, once the initial pandemic panic subsided. But production is now affected by lackluster international demand and problems in shipping goods overseas. Industrial output rose only 3.1% in September compared with a year earlier, the slowest pace since March 2020 when the first effects of the pandemic hit.
Chinese consumers have been much more cautious. After a rebound around the turn of the year, the rate of increase in retail sales has slowed markedly, up 0.3% in September compared 0.8% growth in December and February, and shrank 0.2% in July when pandemic outbreaks led to a return to COVID controls.
China's economy is decelerating rapidly after increasing 7.9% in the second quarter and an exceptional 18.3% in the first quarter. Much of the downward pressure is prompted by central policy, with President Xi Jinping indicating a new push for "common prosperity" and the need to redistribute wealth in the economy and a widening roster of private-sector industries under attack.
Xi decries housing speculation
Xi authored an Oct. 15 article in the Chinese Communist Party journal Qiushi in which he explained more about his thinking on "common prosperity." He said China had accomplished the goal first vocalized by Deng Xiaoping, the architect of China's opening up, to "allow some people to get rich first." Cautioning against the need for a new Great Leap Forward, the disastrous reforms he lived through in the 1960s as a young man under Mao Zedong, Xi again reiterated that "housing is for living in, not for speculation," indicating rising home prices are the root cause of wealth inequality in China. So it seems there is scant chance of any letup in the government's push to force deleveraging of the sector and a high chance of a nationwide property tax being enforced.
The previously revered entrepreneurial class in China is keeping quiet and pledging company funds for social initiatives, with the Chinese Communist Party intent on reclaiming its grip over Big Tech data. Quietly, company chiefs whisper that this shift back to Mao-era thinking and central planning risks setting back an economy that has grown on the basis of the private sector, not its bloated and inefficient state-owned enterprises.
One of the problems of a top-down authoritarian government that claims credit for anything and everything is that it also can be blamed for disappointments.
We are told before even getting the GPD figure that this economic performance comes "under the strong leadership of the Central Committee of the Communist Party of China with Comrade Xi Jinping at its core," boilerplate verbiage that's attached to every public utterance. We hear that "all regions and departments strictly implemented the decisions and arrangements" of the party, coordinating epidemic prevention alongside "economic and social development in a scientific manner."
The unelected Communist government, which took power through a revolution, is terrified of economic instability leading to unrest. So we also hear in this report that the "overall social situation was harmonious and stable," wording you'd be highly unlikely to hear from an economic briefing in the West.
Property sales are plunging amid the forced deleveraging in the sector. Home sales in the 30 largest cities dropped 30% in the first two weeks of October compared with the same time last year, intensifying the 26% fall in September.
A lack of confidence among developers is reflected in the frequent cancellation of land auctions. Between June and October, Beijing saw the sale of 26 of 43 land plots postponed, while red-hot Shanghai pulled seven out of 48 plots.
Evergrande shares remain suspended two weeks after the company requested a trading halt, saying a "major transaction" is in the works. The latest news is that state-owned developer Yuexiu Property (HK:0123) reportedly has pulled out of a US$1.7 billion deal to buy its main office in Hong Kong, with the Yuexiu board concerned that the company's unresolved debt obligations may disrupt any sale.
On a positive note, China's jobless rate fell to 4.9% in September, down from 5.1% in August and 5.4% in September 2020. But China's National Bureau of Statistics, in announcing the overall numbers, noted that the country's domestic recovery is "still unstable and uneven," with wealth gains in rich coastal China far outpacing progress in the country's interior and less-developed west.
