Chinese Economy Grows Slower Than Expected, and the Future Is Not Bright

Chinese gross domestic product grew ‘significantly below target’ in the third quarter of this year, resulting in an additional decline in Chinese stocks. Investors are concerned about the long-term prospects for the world’s second-largest economy as GDP increased by 3.9 percent year-on-year, which is better than Bloomberg’s analysis of 3.3 percent, but still below China’s full-year target of 5.5 percent.

Today’s data release, delayed from last Tuesday, comes after Chinese President Xi Jinping extended his rule for an unprecedented third term, thereby strengthening his political power at the 20th Congress of the Communist Party last week. China continues to struggle with a property crisis, strict zero-COVID controls, and lockdowns, which have largely limited the spread of the virus but also crippled consumer activity.

The data release contributed to the prevailing pessimism in Chinese stocks and further disappointed investors after the party congress failed to send more positive signals for the economy. The Hang Seng China Enterprises Index in Hong Kong fell by as much as 7.4 percent to its lowest level in 14 years. The benchmark CSI 300 index of stocks listed on the Shanghai and Shenzhen exchanges fell by as much as 3.1 percent.

Zero-COVID policy will have a negative impact on the economy

– This is a panic sell-off. It is quite clear that investors are simply not confident about the future of the Chinese economy – said Dickie Wong, head of research at Kingston Securities in Hong Kong, to the Financial Times.

Although the government did not provide any explanation for the delay, this move was widely seen as an attempt to avoid distracting attention from the congress, which is held every five years and reviews the upper echelons of the Communist Party.

It is worth noting that at the congress, Xi spoke little about China’s economic weaknesses and mostly praised the coronavirus control measures, which include almost daily testing and quarantine rules that have effectively closed the country off from the rest of the world. In preparation for the event, the chief Chinese epidemiologist stated that there is no timeline for relaxation.

Iris Pang, chief economist for China at ING, said that although growth in the third quarter was better than expected, the broader picture of recovery was ‘mixed’ and driven by Xi’s zero-COVID policy.

– This will continue to affect the labor market and have a negative feedback effect on future retail – she said.

Pang also noted that after personnel changes in the Communist Party – including the departures of Vice Premier Liu He, central bank governor Yi Gang, and top regulator Guo Shuqing from leadership – the Chinese economic team has become even more centralized under Xi.

– This implies that President Xi has even more influence over policy direction – Pang added.

‘Further large-scale isolation is not excluded’

Growth in the third quarter exceeded growth in the second quarter of just 0.2 percent when Shanghai, the largest Chinese city and financial center, was under strict two-month quarantine. In September, retail sales grew by only 2.5 percent, missing Reuters’ forecast of 3.3 percent.

Industrial production, which drove China’s growth in the first two years of the pandemic, increased by 6.3 percent last month. This was better than analysts’ expectations of 4.5 percent, as the manufacturing sector in the country recovered from paralyzing supply chain disruptions and lockdowns, the Financial Times reports.

Julian Evans-Pritchard, senior economist for China at Capital Economics, said that although the industry performed somewhat better than expected, the outlook remains ‘bleak’ after most of the economy lost momentum last month.

– There is no prospect that China will lift its zero-COVID policy in the near future, and we do not expect significant easing before 2024. Recurring viral disruptions will therefore continue to affect personal activity, and further large-scale isolation is not excluded – he added.

Real estate sales fell by 22 percent

Investment in fixed assets rose by 5.9 percent in the first nine months of this year. However, real estate sales, measured by area, fell by 22 percent, and new construction started fell by 38 percent, while investment in real estate fell by eight percent.

Goldman Sachs analysts noted that data on real estate-related activities remained poor in September, especially for new homes and real estate sales. According to their data, the volume of transactions or purchases of new homes in 30 cities in October has so far fallen by 18 percent year-on-year.

– Despite a greater number of local measures to alleviate housing issues in recent months, we believe that real estate markets in lower-tier cities are still facing strong turbulence due to weaker growth fundamentals than larger cities, including net outflows of population and potential over-supply issues – said Goldman Sachs.

Policymakers have gradually eased key interest rates this year and taken measures to accelerate the completion of unfinished housing construction projects, which were delayed after highly indebted developers like Evergrande failed to meet obligations.

However, they have failed to implement major stimulus measures and are now facing currency weakening and a domestic stock market that has lost 34 percent following the renminbi’s decline against the dollar.