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China’s economy is cooling rapidly. Some of its challenges are self-inflicted but others will resonate with policymakers in major economies elsewhere.
The third-quarter GDP numbers China reported on Monday – 4.9 per cent year-on-year growth – at face value look respectable, albeit a smidgeon below expectations.
Xi Jinping’s economy is facing a number of challenges.Credit:AP
Inserted into a continuum – first quarter growth of 18.3 per cent, second quarter growth of 7.9 per cent and now growth of less than five per cent – they reflect, however, a dramatic slowing of activity.
There’s no single or simple explanation for why the economy than burst out of the blocks from the worst of the pandemic last year, and was the only major economy to post positive growth in 2020 (2.3 per cent), should now be decelerating so sharply.
The explanation lies within a complex mix of domestic policies and more macro influences that are shared with other major economies as the global economy emerges from the ravages of the pandemic.
The latter include the continuing dislocations generated by the Delta mutation, which has affected port activity in China and elsewhere and severely disrupted global supply chains.
Labour shortages and shortages of containers and container ships have combined with port closures and reduced handling capacity to generate enormous congestion in international supply chains built for the calmer pre-pandemic times.
The global shortage of semi-conductors – the computer chips integral to everything from cars to consumer electronics – is also a global drag on activity. It has particularly impacted China, the world’s key manufacturing base.
Inflation is another global concern. In the US it is at 30-year highs. In China factory gate prices have been rising at their fastest rate in more than a quarter of a century. In September, they were 10.7 per cent higher than a year earlier.
Slowing growth and high levels of inflation threaten stagflation, a phenomenon last seen during the oil crisis in the 1970s and one that would pose a dilemma for central banks, given that raising interest rates to choke off inflation would damage already weak economic growth.
The energy crisis that has hit Europe and Asia is another hostile influence, driven by soaring oil, gas and coal prices.
Australia’s reliance on China as a market for commodity exports leaves it vulnerable to a slowdown.Credit:Bloomberg
In China, however, there is a domestic overlay to the spiralling costs and acute shortages of power.
As China rebounded strongly from the worst of the pandemic so too did its factory activity and its demand for energy (and other raw materials, like iron ore) in what is predominantly a coal-fired economy. About 60 per cent of China’s power is generated from coal.
That surge in demand occurred even as Xi Jinping committed China to lowering the carbon intensity of its economy by three per cent this year, achieving peak carbon by 2030 and carbon neutrality by 2060.
After a first-half binge on coal and iron ore and other raw materials powered a 12.7 per cent GDP growth rate, Beijing ordered its steel mills, among its most energy-intensive sectors, to cut their production by 12 million tonnes to offset the industry’s first-half growth. Other major emitters were also directed to reduce their emissions by reducing their energy intakes. Domestic coal producers were shut down.
There’s no single or simple explanation for why the economy than burst out of the blocks from the worst of the pandemic last year, and was the only major economy to post positive growth in 2020 should now be decelerating so sharply.
The environmentally-driven restrictions interacted with soaring coal and gas prices that generators couldn’t pass onto their customers because of price caps. Instead they started rationing power, which in turn caused factories to reduce their energy intake by reducing or stopping production.
The authorities have recently responded by loosening the price controls, expanding domestic coal production and scrambling to import more coal and gas (a factor in the spectacular surges in global coal and gas prices).
That has, however, yet to have a discernible effect and there is an inherent conflict between China’s energy requirements and its climate change commitments.
If China’s domestic policies exacerbated the impact of higher global energy prices then the property crisis reflected in China Evergrande’s implosion also has some policy-driven foundations.
The imposition of rigid leverage and debt-servicing rules on the property development sector has cut off the big developers’ access to debt markets and generated a liquidity crisis in a sector that accounts for about 30 per cent of China’s GDP and has been at the heart of its remarkable growth rate in recent decades.
A massive overhang of 30 million unsold apartments, vast numbers of incomplete or undeveloped projects and a reliance on pre-sales of properties that has now scared off buyers has destabilised the industry.
Property sales, relative to last year, slumped 20 per cent in August and 17 per cent in September and the sector’s woes are flowing into the developers’ supply chains and property-related activity – even furniture sales – as anxiety increases throughout the sector and property purchases dwindle.
So far the authorities have resisted the temptation to inject some stimulus into the economy, or overtly provide financial support for the industry, because that would mean walking back from the efforts to reduce excessive leverage in the economy.
Beijing’s hand might be forced, however, if the broader economic slowdown continues or the property sector’s problems morph into a wider financial crisis and a more severe threat to growth.
Beyond the continuing effects of the pandemic, the logistics challenges confronting the world’s key manufacturing base, the energy crunch, the wider deleveraging of the economy that has contributed to the shaky state of the property sector and the surges in the costs of some key raw materials there are some other policies that may also be impacting growth.
The wipeout of the $US100 billion private education industry this year amid the broader crackdown on big technology companies, particularly fintechs, has caused dislocation and uncertainty and wider confusion about where the abrupt and structural shift in Beijing’s policies might lead and who might be next at risk.
China’s isn’t the only economy facing significant and sometimes novel challenges in the complicated environment that has emerged as the world emerges from the worst effects of the pandemic.
It does, however, also confront some peculiar issues of its own, some of its own making. How it deals with them will, given its prominence within the global economy, have flow-on effects to the rest of the world and, most particularly, given our reliance on China as a market for commodity exports, Australia.
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