China’s growth momentum continues to fade
Despite strong export performance, Chinese growth momentum declined notably in August, reflecting a host of factors on the domestic front. While the disruptions caused by a recent covid outbreak are gradually fading, some other headwinds may persist throughout the rest of the year, and thus continue to put downward pressure on growth in the near term.
The resurgence of covid cases (due to the Delta variant) in July and August was the most widespread outbreak of the pandemic in China since the first one in early 2020. It affected more than a dozen of Chinese provinces and led to strict containment measures at multiple locations, with a significant impact on consumption at a national level. Growth in retail sales slowed and spending on restaurants and catering services contracted. The effects of the virus outbreak could also be seen in the decline in consumer confidence.
While less hurt by covid concerns, industrial production slowed to 5.3% y-o-y in August from 6.4% in July. But there are two other factors affected prospects for industrial activities. First, the deceleration in fixed-asset investment, particularly in the property sector, is increasingly weighing on construction and related industries and may continue to do so. Second, the Chinese government’s commitment to reducing carbon emissions after a peak in 2030 seems to be starting to bite.
The weakness in property reflects stricter government control. Since late last year, when the Chinese government introduced a series of stringent measures to try to rein in excessive leverage, developers have clearly slowed down their expansion and investment in the sector has dropped. Almost all major indicators of property development are on a downward trend.
Looking forward, we expect the covid-related drag on domestic consumption to gradually fade as the latest outbreak has been brought under control. However, growth will likely remain under pressure for other reasons. First, the “zero-covid” strategy adopted by the Chinese government will likely stay for the foreseeable future and thus continue to constrain the recovery in household consumption. Second, there is no sign that the government’s clampdown on the property sector will ease significantly in the near term. The ongoing financial woes of some large developers will likely weigh on sentiment and lead to further slowdowns in home purchases and investment. This, in turn, will put pressure on construction and industrial activities.
On the policy front, while we are already seeing an increase in the pace of the issuance of local government bonds, there will be a time lag before the economy reacts to this fiscal support. In addition, credit growth does not seem to have troughed yet.
We recently revised down our Chinese GDP forecast for 2021 to 8.7% from 9.0% on covid disruptions and weakening data. For the moment, we are keeping that forecast unchanged, but recognise that there could be further downside risk.