Steel mills had to contend with power cuts. Computer chip shortages have slowed automobile production. Distressed real estate companies bought less building materials. The floods disrupted business in north-central China.
All of this has had a negative impact on the Chinese economy, a key engine of global growth.
The National Bureau of Statistics said on Monday that China's economy grew 4.9 percent in the third quarter compared to the same period last year; the period was significantly slower than the 7.9% increase in the previous quarter. Industrial production, the pillar of Chinese growth, weakened sharply, especially in September, posting its worst performance since the early days of the pandemic.
Two positive points kept the economy from stagnating. Exports remained strong. And particularly prosperous families started spending money again on restaurant meals and other services in September, as China once again succeeded in quelling the few outbreaks of the coronavirus. Retail sales increased 4.4% in September from the previous year.
Chinese officials are showing signs of concern, although they have so far refrained from triggering a major economic stimulus.
“The current uncertainties in the international environment are accumulating and the national economic recovery is still unstable and uneven,” said Fu Linghui, spokesperson for the National Bureau of Statistics.
Government-level efforts are among the current economic challenges.
In recent months, the government has launched a series of measures to tackle income inequality and constrain businesses, in part with the aim of protecting the health of the economy. But those efforts, including penalizing tech companies and discouraging real estate speculation, have also weighed on growth in the current quarter.
The government had also imposed limits on energy use as part of a broader response to concerns about climate change. Now electricity shortages are hurting industry and the country is rushing to burn more coal.
“The economy is sluggish,” said Yang Qingjun, owner of a corner grocery store in an aging industrial shoe factory district in Dongguan, near Hong Kong. The power cuts have prompted neighboring factories to scale back operations and stop paying overtime. Local workers live on a more frugal basis.
“Money is hard to come by ,” Yang said.
The Chinese economic slowdown could lead to a further rise in the cost of trade and the price of inputs. We can also expect an increase in delivery times, and a potential exacerbation of shortages of intermediate goods, already noted, in the United States and in Europe. In terms of global demand, countries exporting to China could be affected, and particularly those most exposed to the construction and metallurgy sectors (Chile, Hong Kong, Peru, Australia, South Africa). On the other hand, energy exporting countries, and more specifically thermal coal, should see demand increase due to the energy crisis currently undergone by China.
Trying to solve the real estate issue
Urbanization was once a great engine of growth for China. The country has built spacious apartments in modern skyscrapers for hundreds of millions of people, with China producing as much steel and cement as the rest of world production combined, if not more.
Now real estate - in particular, the debt that developers and home buyers have racked up - is a major threat to growth. The country's largest developer, China Evergrande Group, faces a severe cash shortage that is already spilling over to the economy.
Construction on some of the company's 800 projects has come to a halt as suppliers wait to be paid. Several small promoters had to scramble to cope with the bond payments.
This could create a vicious cycle for the housing market. The worry is that developers can dump large numbers of unsold apartments onto the market, keeping buyers on the sidelines as they watch to gauge how far prices can drop.
“Some developers have run into trouble, which can further affect the mood and confidence of buyers, causing everyone to postpone buying a home,” said Ning Zhang, senior economist at UBS.
The fate of Evergrande has broader significance for the long-term health of the economy.
Officials want to send the message that bond buyers and other investors should be more wary of lending money to indebted companies like Evergrande and that they shouldn't assume the government will always be there to bail them out. But authorities must also ensure that suppliers, builders, home buyers and other groups are not in serious financial difficulty.
Solve the difficulties of heavy industry
As power shortages have spread across eastern China in recent weeks, regulators have cut power to energy-hungry operations like chemical plants and steel plants to avoid leaving households in the dark. It was a double whammy for industrial production, which was also hit by weak construction.
Industrial production in September rose only 3.1% from the previous year, the lowest since March of last year, when the city of Wuhan was still in lockdown due to the pandemic.
"Power outages are to some extent of more concern than the Evergrande crisis," said Sara Hsu, visiting researcher at Fudan University in Shanghai.
The Energy Bureau of Zhejiang Province, a heavily industrialized region on China's coast, cut electricity this fall for eight energy-intensive industries that transform raw materials into industrial materials like steel, cement and chemical products. Together, they consume almost half of the province's electricity, but only represent an eighth of its economic output.
Denying power to these industries risks creating shortages of industrial materials, which could spill over into supply chains.
Assembly plants in industries that use less electricity, such as automobile manufacturing, have not faced the same demands for power outages. But they face other challenges.
The coronavirus outbreaks in Southeast Asia have cut off the supply of some auto parts. There is also a global deficit of semiconductors, an essential component of cars.
Volkswagen, the market leader in China, said on Friday that production fell as the company faced a growing chip shortage and other supply chain issues. The company does not have enough cars to fill customer and dealer orders.
“Our priority is to work on our order book ,” said Stephan Wöllenstein, CEO of Volkswagen's China division.
Finding strength in exports
For months, economists have made the same prediction: China's rapid export growth cannot last.
Economists were wrong.
Chinese exports continued to climb up in the third quarter and finished strong, up 28.1% in September from the same month last year. China recorded its third-highest ever monthly trade surplus last month.
China has remained essentially strong in exports since its economy emerged from the pandemic in the spring of last year. As much of the world curled up at home, families splurged on consumer electronics, furniture, clothing, and other goods that China manufactures in abundance.
The export boom, however, is creating another source of tension between the United States and China.
Katherine Tai, the U.S. trade representative, hinted in a speech two weeks ago that China's export prowess was in part the result of subsidies and other unfair practices. “For too long, China's lack of adherence to global trade standards has undermined the prosperity of Americans and others around the world,” she said.
But Chinese officials and experts say the country's success is the result of a strong work ethic and constant and significant investment in manufacturing. They were quick to point out that by firmly bringing the pandemic under control within weeks at the start of last year, China was able to quickly reopen its factories and offices.
“We have very strong supply, but weak demand ,” said Tu Xinquan, executive dean of the China Institute for World Trade Organization Studies at Beijing University of International Affairs and Technology. “Companies must therefore export. "
Posted on 2021-10-20 09:37
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