Gabriel Crossley, Kevin Yao

BEIJING (Reuters – China raced ahead last year of its major competitors in terms of the COVID-19 induced slump. Beijing saw a chance for tougher measures to target developers who are in debt, as well industrial polluters, and tech companies.

Bold reforms by President Xi Jinping are aimed to reduce the economy’s dependence on debt and property, redirect more resources towards high-tech manufacturing, and create a more equitable and greener economy.

Slowing momentum in China’s second largest economy highlights the risks. This is a challenge for Xi to realize his goals and implement them.

In the last quarter, growth was only 4.9% annually which is the worst performance in over a year. Analysts believe that policymakers won’t be slow to act on long-term problems and economic distortions.

“The slowdown has been largely policy-driven… (but), Beijing is ready to negotiate,” stated Dan Wang (chief economist Bank (China).

New construction is down despite efforts to cool off the realty sector. The debt crisis at China Evergrande Group has raised concern about wider financial contagion.

Energy intensity targets and power cuts amid shortages caused a drop in industrial production. This was exacerbated when mines were closed or safety inspections. Consumption has been affected by China’s COVID-19 strategy, which is “zero tolerance”.

These policies could have reduced quarterly growth by 0.7%, according to Nie Wen (a Shanghai-based economist at Hwabao Trust).

Last December, Chinese leaders pledged to make the most of the opportunity created by economic recovery and focus their efforts on structural reforms. This year’s more flexible and modest growth goal of “above 6.6%” gave the leaders plenty of flexibility. Analysts are expecting around 8.8% growth, even with the slowdown.

Xi Jinping’s drive to achieve “common prosperity” has led to regulatory crackdowns that have disrupted tech, education, and entertainment. This has also decimated the online tutoring sector, raising concerns about China’s role in the economy.

NO MAJOR SHIFTS

Beijing has been displaying confidence, but it hasn’t signaled any significant policy changes to combat the slowdown. China’s Premier Li Keqiang stated last week that it has all the tools necessary to deal with its economic problems.

Fearful of a bubble in property prices, policymakers are expected to keep a lid on speculation and rampant borrowing, but may soften certain tactics, analysts and sources told Reuters.

Nomura analysts wrote in a note that they believe it will do more harm to the financial market than Beijing and would allow some relief to be granted to certain curbs.

Hang Seng’s Wang suggested that there may be more marginal relaxation in real estate measures for cities facing greater fiscal pressure.

Beijing’s employment numbers are encouraging, despite the slowdown in housebuilding and factory activity. The nationwide urban unemployment rate fell to 4.9% in September, which is the lowest level since 2018.

However, analysts warn that China’s unemployment figures don’t accurately reflect the number of rural migrants who are jobless or have stopped looking for work.

Graphic: China’s official jobless rate falls below pre-COVID levels https://graphics.reuters.com/CHINA-ECONOMY/gkplgxbowvb/chart.png

An economically healthy labour market can help the government to tolerate slowdowns, though certain workers could be “underemployed”, as some factories cease production, stated Zhang Zhiwei (chief economist, Pinpoint Asset Management).

Exports are another positive sign. They have outperformed domestic expectations for several months, as the demand for Chinese goods has helped to buffer domestic woes.

China’s growth for the third quarter was almost 20% thanks to its net exports. This is nearly double the contribution of the prior three months.

China was fortunate this year with its exports continuing to surpass expectations, supporting growth. Zhang stated that it is difficult to predict how long this trend will continue.

It is unlikely that COVID-19 control will be relaxed to increase consumption anytime soon. In Erenhot (a northern Chinese city), four cases have been reported recently. Vehicles without an official clearance were forbidden from leaving and cinemas and gymnasiums closed.

An industry group said that power problems may improve in the fourth quarter. However, this was after taking a series of steps to increase coal supply, including calling for the restarting production at closed mines. Analysts warn that the crunch will continue until next year.