China: Why did the pace of development suddenly get a 'shock'?

Posted on 18th Oct 2021 by rohit kumar

China's economy grew by 4.9% in the July-September quarter compared to a year earlier. However, this is the slowest pace in a year and is contrary to analysts' estimates.

This is much less than the previous quarter when the growth was 8%. From this, it is being speculated that it may be very difficult to bring the economy back on track.

For this, power cuts, the re-increase in infection cases of Covid-19, and strict policies are being blamed on many industries in China.

One expert said these changes could slow down the pace of growth for the rest of the year and should not be ignored.

The world's second-largest economy has faced a lot of challenges in recent months.

power outage

First of all, if we talk about the supply of electricity, due to the increase in prices across the world, the prices of raw materials have been affected.

This is happening at a time when Beijing has pressured regional governments to reduce carbon emissions as China aims to make itself carbon neutral by 2060.

Many provinces of China have started rationing electricity, due to which there have been power outages from homes and factories.

Along with this, it is also a coincidence that the country's largest coal-producing province has been flooded at this time. Shaanxi Province contributes 30% of China's total coal production.

Due to heavy rains, coal prices have reached high and the government has to cut production capacity.

Due to power cuts, many industries of the country are facing a lot of difficulties and these are those industries that use a lot of electricity. These include industries of cement, steel, and aluminum products.

China's 'factory gate' (the price that a manufacturer charges a wholesaler for a product) has registered the fastest increase in prices in 25 years.

On rising coal prices, Julian Evans-Pritchard, senior Chinese economist at Capital Economics, says that "such a decline in the industry appears very deep."

Crisis in the property sector

This situation has arisen at a time when China's property sector is pressing for not allowing its debts to increase further.

The latest example is the China Evergrande Group, which has taken more than $ 300 billion in debt and is on the verge of bankruptcy.

Another real estate company, Fantasia, has declared itself bankrupt, and Cynic Holdings has been warned that it is following the same path.

"The slow pace in the property sector will affect the pace of works like contract construction, building materials, and home furnishings," says Yu Soo of the Economist Intelligence Unit.

Despite this, China's central bank broke its silence at the end of the week, not describing this crisis as more dangerous.

So Lane, director of the People's Bank of China, said Evergrande's "financial liabilities accounted for less than a third of its total liabilities and that its debtors varied."

"No one financial institution is at risk because of Evergrande. Its threats to the financial industry can be controlled."

What can happen next?
Voi Chen Ho, the economist at the United Overseas Bank of Singapore, says the impact of the energy crisis and the hit in the property sector will be that banks may underestimate China's growth momentum for this year.

"The numbers are much lower than we thought. I think this growth will be even slower in the fourth quarter because we will be able to see the impact of the energy crunch."

At the same time, big tech companies from the gaming to the education sector are facing a lot of difficulties due to the policies of China brought for social change.

The plan that the Chinese government has made public for the next five years shows that this tough action on these companies will go ahead.

These reforms are aimed at long-term growth and are currently burdening domestic consumption and investment, according to JP Morgan Asset Management's Chaoping Hsu.

"Since July, when several policy measures were implemented, it was impossible to avert these short-term shocks," he says.