China Power Crunch Hits GDP Growth

SHANGHAI — China’s economic growth continued to decelerate in the third quarter, as gross domestic product came in at 4.9%, softened by the country’s zero-tolerance COVID measures and energy shortages.

The year-on-year GDP growth rate, published on Monday by the National Bureau of Statistics for the three-month period through September, was below the median 5% expansion forecast by 29 economists in a Nikkei poll released earlier this month.

The figure slid from 7.9% for the April-to-June quarter, weighed down by high commodity prices amid uncertainty kindled by the China Evergrande Group’s debt crisis, which is piling risk onto the property and banking sectors.

The reading also reflects weak overall activity, including in manufacturing and consumer spending. Retail sales of consumer goods, a barometer of household spending, edged up by 4.4% in September, compared to 2.5% in August, but was still well below the double-digit growth that had continued till June.

Certain factors have persuaded economists to be cautious, at least for the near term. Rising coal prices are hitting the profitability of electricity providers, making the utilities reluctant to generate power. As it prioritizes supplying power to sectors that touch everyday life, the government is capping supplies to the steel, cement and other energy-intensive industries. The result has been less production and more inflation.

The statistics office last week announced that the producer price index for manufactured goods in September rose by 10.7% from a year earlier, the strongest surge in the past 25 years, as far back as comparable data goes.

The government forecasts China’s economy to grow 6% for all of 2021, the International Monetary Fund projects 8% and the Asian Development Bank 8.1%.

The economy expanded 9.8% in the first nine months of the year, largely driven by trade as both exports and imports jumped nearly 23% in yuan terms.

Service sector growth of 19.3%, led by software and information technology services, also stoked the nine-month expansion.

The statistics office said GDP grew 0.2% in the third quarter from the previous three months, which the U.K.’s Capital Economics noted is the second lowest since China began revealing such data in 2010.

Growth lost more steam in September as industrial production slid to 3.1% from 5.3% in August, while the official manufacturing Purchasing Managers’ Index fell to 49.6. It slipped below 50 — which the statistics office says “reflects the overall economy is in recession” — for the first time since February 2020.

Meanwhile, officials have been playing down the country’s power crunch and worries over the Evergrande crisis.

“The energy supply shortage is temporary, and its impact on the economy is controllable,” Fu Lingxuan, the National Bureau of Statistics’ spokesperson told reporters on Monday, citing recent measures to boost coal supply.

Zou Lan, head of financial markets at the country’s central bank, said Evergrande had “blindly diversified and expanded business,” urging the property group to offload assets to raise funds to pay off debts.

“The risk exposure of individual financial institutions to Evergrande is not big and the spillover effect for the financial sector is controllable,” Zou said on Friday.

While fallout from the power shortages and concerns over the property market may have eased from September, their impact on China’s broader economy should not be underestimated and will be a major downside risk in the fourth quarter, warned Shanghai-based Yue Su, principal economist at The Economist Intelligence Unit.

“The slowdown in the property sector will affect the activities of firms in areas such as construction contracting, building materials and home furnishing,” said Su, adding that energy-intensive industries will face rising costs as well.

Hong Kong-based Tommy Wu of Oxford Economics said policymakers are likely to take more steps to shore up growth, including ensuring ample liquidity in the interbank market, accelerating infrastructure development and relaxing some aspects of overall credit and real estate policies.

And not all economists agree with China’s official data.

Julian Evans-Pritchard of U.K.-based Capital Economics said the research firm’s in-house measure, the China Activity Proxy, tracked a sharp 3.9% quarter-on-quarter contraction in the third quarter, compared to a 3.0% expansion in the previous quarter.

“For now, the blow from the deepening property downturn is being softened by very strong exports,” said Evans-Pritchard. “But over the coming year, foreign demand is likely to drop back as global consumption patterns normalize coming out of the pandemic and backlogs of orders are gradually cleared.”

The benchmark Shanghai Composite Index dropped as much as 0.92% on Monday morning, before closing for the midday break down 0.35%.

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Source: China power crunch hits GDP growth – Nikkei Asia

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