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China’s GDP: Will weaker data hurt Xi’s ambitious political agenda?

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

The headline gross domestic product figure from the National Bureau of Statistics and other indicators will capture the initial impact of two economic shocks: the debt crisis in Evergrande, one of China’s largest real estate developers, and the widespread power shortages and paralyzing.

President Xi Jinping’s administration has done little to ease the pressures that are building up on the country’s real estate sector, even though it accounts for as much as 30 percent of total economic output.

Beijing, by contrast, has seized what it believes is a “window of opportunity” to discipline over-leveraged property developers, which it sees as a serious threat to China’s financial stability.

“The emphasis on deleveraging, reduced property speculation and energy shortages have likely substantially affected China’s already weak growth momentum,” said Eswar Prasad, former head of the IMF’s China division who now works in Cornell University.

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

Here are five things to keep in mind in next week’s launch:

Has the Chinese economy stalled on a quarterly basis?

The Chinese economy expanded 12.7 percent in the first half of the year compared to the same period last year, when the Covid-19 pandemic emerged in the central province of Hubei and severely disrupted economic activity across the country. country.

However, this big jump in headlines masked a quarter-on-quarter expansion of just 0.4% during the first three months of the year and 1.3% in the second quarter.

Analysts at Goldman Sachs forecast that third-quarter economic output did not grow at all on a quarterly basis. In a Sept. 28 report, they said there was also “considerable uncertainty” about China’s fourth-quarter outlook due to “the government’s approach to managing tensions in Evergrande, the rigor of enforcing environmental targets, and the degree of policy flexibility “.

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

Evergrande warned on September 13 that monthly sales had almost halved in August compared to June and forecast another dismal result in September, which is normally an excellent month for the sector.

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

Infrastructure investment growth has also been consistently slower in Xi’s second term, which began in 2018, than it was in his first (2013-17), reflecting his administration’s concern about debt levels in the US. financial vehicles of the local government, which finance most of the investment in infrastructure.

How has the energy shortage affected industrial production?

Industrial production growth was already slowing (just 5.3% year-on-year in August compared to 8.3% in June) before the magnitude of China’s energy crisis, such as Evergrande’s, surprised people. everyone from factory owners to economists in September.

The main reasons for power shortages vary by region. They include coal shortages and rising coal prices, forcing plants to limit generation, as well as stringent energy and environmental efficiency targets.

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

Will retail sales recover?

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

If this continues, Chinese politicians will find it even more difficult 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 was expected as Xi took limiting house price increases even more seriously to address a key source of inequality.”

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

Prasad warned that “government moves to simultaneously increase state control of the economy and lack of clarity about its intentions toward private enterprise could act as a drag on long-term growth.”

But from Xi’s crackdown on China’s private sector tech groups earlier this year to his willingness to push Evergrande and other developers to the brink of insolvency, he has shown no signs of moderating his campaign to radically reform the economic model. from China. Monday’s data release could prove to be early proof of this ambitious political agenda.

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