Why China’s Evergrande Has Global Markets on Edge

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Now that the statistical distortions from the pandemic are largely in the past, China’s growth rate is expected to return to around its pre-coronavirus trajectory. Before China began feeling the impact of the pandemic early last year, its economy expanded at a pace of 6.1 % in 2019, the slowest such year-over-year growth rate since 1990.

China was the only major global economy to grow during last year’s pandemic-induced slowdown; its economy expanded 2.3 %. With most economists expecting growth of 8% or more this year, Beijing policy makers instead set a relatively modest full-year GDP target of 6 % or more for 2021, giving it more room to deal with long-festering issues in the economy—chief among them dizzying debt levels, particularly in the real-estate sector.

The question now is whether Beijing’s campaign to impose greater discipline on its economy—as well as surging commodity costs and continued coronavirus-related distortions in the global economy—will take a larger-than-expected toll and force policy makers to re-emphasize growth.

Despite the sharp slowdown in the third quarter, China’s policy makers so far appear to be relatively sanguine about the headwinds facing the economy.

On Friday, China central bank officials suggested it wouldn’t resort to a relatively large stimulus to drive up the growth rate in the final quarter of the year, for example by flooding the financial system with liquidity or slashing benchmark interest rates.

Officials also played down risks from the debt crisis at China Evergrande Group, the country’s most indebted property concern, whose troubles have rattled markets and raised questions about China’s overall economic and financial health.

In a reflection of the worries around China’s property market, which has traditionally been a key growth driver for the broader economy, new construction starts as measured by contracted floor area fell 4.5 % in the first nine months of the year, widening from a 3.2 % decline recorded in the January-to-August period, according to official data released Monday.

Evidence that Beijing’s imposition of borrowing curbs on developers was hurting market sentiment and deterring builders from starting new projects could also be seen in slowing growth numbers for real-estate investment and home sales by volume.

Monday’s data (Oct.18, 2021) release also showed weakness elsewhere in China’s economy, though the country’s headline jobless number dropped and domestic consumption recovered somewhat after a difficult summer.

Industrial output, a measure of factory production, rose just 3.1 % in September from a year earlier, the statistics bureau said Monday, slowing from August’s 5.3 % year-over-year growth pace and falling short of economists’ expectation for a 3.8 % expansion.

China’s factory sector was held back by widespread power outages across the country as coal prices soared and officials attempted to hit more stringent carbon emission targets.

Fixed-asset investment also fell short of expectations, increasing 7.3 % in the first three quarters of the year, the statistics bureau said—a slowdown from the 8.9 % growth pace recorded in the January-to-August period. Economists had expected investment to rise by 7.9 % for the first nine months of the year.

On the plus side, retail sales, a key gauge of domestic consumption, rose 4.4 % in September from a year earlier, rebounding from August’s lackluster 2.5 % year-over-year increase and topping the 3.4 % rate expected by economists.

Video and caption courtesy by the Wall Street Journal

Domestic consumption took a hit over the summer after fresh waves of new coronavirus infections prompted authorities to restrict people’s movements in some parts of the country, dampening consumer demand and hitting sectors that rely on close human contact.

China’s headline jobless figure, the surveyed urban unemployment rate, fell to 4.9 % in September from 5.1 % in August.

www.wsj.com