What goes up: Why has China's GDP growth slowed?

Three factors contributed to the slowdown: the cooling housing market, energy shortage, and the pandemic.

Photo from CFP

Photo from CFP

By XIN Yuan


China’s economy grew 4.9 percent in the third quarter from the same period last year, lower than the 7.9 percent of the previous quarter, and is one of the lowest since the beginning of the pandemic. Economists have attributed the downturn to three factors: COVID outbreaks, power cuts, and the cooling down of the real estate market.

August saw an uptick in the number of regional outbreaks, which led to lockdowns and supply chain disruptions. Although infections fell in September, the virus may cast a lasting shadow on retail and hospitality.

Output has faltered, especially in September when growth slowed down to 3.1 percent. Part is due to problems in the global energy market, but the government is reluctant to run coal plants at maximum capacity out of climate change concerns. Limits on energy use have forced factories to reduce hours. Some workers have taken pay cuts.

Houses of cards

Another pounding comes from the real estate sector, where measures to cool down the housing market finally have their desired effect. But most of China’s ordinary household wealth is tied to real estate.

“If everyone expects prices to drop, no one will buy. And if real estate really tanks, household wealth will shrink, which will affect spending,” said economist MAO Zhenhua of Renmin University.

Another economist, LI Zhan of China Merchants Fund Management said fiscal spending will also be hot. Property developers are suddenly wary of getting deeper in debt and are buying less land, which tightens the screws on local government coffers.

“Receipts from the sale of land funded 8 trillion yuan (US$1.3 trillion) of local spending last year,” he said. “With less income from land, less will be spent on infrastructure. The effects may not be seen in the short term, but will certainly become a problem in the future.”

Last year, the central government signaled that more money would be spent in areas such as 5G and green energy — the “New Infrastructure” — but if the real estate sector staggers to a halt, there will be no money to turn these plans into actual hardware.

“There are not many high-quality projects in the pipeline, to begin with. Those that have begun operations are not producing very high returns yet, so new money is always needed. Less money from selling land means less investment by the public sector,” Li said.

The private sector is not investing either. Commodities and energy are very expensive. The producer price index (costs for factories) rose 10.7 percent in September, the biggest increase on record.

“It’s particularly difficult for smaller businesses,” said Li. “Margins are already thin and they are not motivated to increase capacity, or even take large orders.”

Tough at the bottom

Although retail was strong in Q3, economists are concerned by an emerging wealth gap. Employment numbers are decent, but the low-income group is not taking much home. When companies cut wages, they are badly hurt and spend less on food and clothing.

These disruptive factors are not going away any time soon. One view is that the government should increase budgets, cut taxes, and pour money on the problem, restoring market confidence and bringing some stability in the short term. Only continued basic research and supply chain investment will ensure returns in the long run.