China slowdown spells downside risk for global economy

Oct 19, 2021

CHINA, the engine for global growth, has reported a slower 4.9 per cent growth for the third quarter as it battles an unstable domestic recovery haunted by recurring Covid-19 outbreaks, power outages and a real estate albatross; all of which spells downside risks for the world's economy, including Singapore which counts the mainland as a major trade partner.

On Monday, Fu Linghui, spokesperson for the National Bureau of Statistics, said at a press conference that domestic and overseas risks and challenges have increased in the third quarter. China's Q3 gross domestic product (GDP) rose 4.9 per cent on year, marginally below the consensus estimate of a 5.0 to 5.2 per cent growth. However, it was sharply weaker than the 7.9 per cent growth in Q2 and the blistering 18.3 per cent surge clocked in Q1.

Industrial output, the mainstay of China's growth, was hard hit, decelerating for seven straight months to 3.1 per cent in September, posting its worst performance since the early days of the pandemic. Computers, chemicals and ferrous metals smelting showed meaningful slowdowns in year-on-year growth.

"(China's) Q3 real GDP growth weakened on the back of adverse weather conditions, a wave of Covid-19 outbreaks and related control measures, energy constraint and related production suspension, and regulations on the property sector," Goldman Sachs economists said.

The weaker than expected September industrial production growth reflected the drag on production from power outages that have forced many factories to cease or cut operations.

Oxford Economics' head of Asia economics Louis Kuijs, added that growth was dragged down by a slowdown in real estate, amplified by spillover from Evergrande, China's property developer reeling under a mountain of debt worth more than US$300 billion.

Fixed asset investment is estimated to have fallen by 1.7 to 2.5 per cent in the month of September compared to a year ago, dragged primarily by the 3.5 per cent drop in real estate investment - the first contraction since February 2020.

"Investment activities have been subdued as a result of the tight credit conditions," said Chaoping Zhu, global market strategist at JP Morgan Asset Management.

China's weak numbers sent the yuan lower, and capped potential upside to Asian stock markets on concerns about the world economic recovery. MSCI's broadest index of Asia-Pacific shares outside Japan was last down 0.34 per cent, while Japan's Nikkei lost 0.15 per cent.

Iris Pang, chief economist of Greater China at ING, has revised China's GDP down to 4.3 per cent on year for Q4 2021, from 4.5 per cent, and revised the full year 2021 GDP growth to 8.9 per cent, from 8.7 per cent after the release of the Q3 data. UOB has also downgraded its full year growth outlook for China to 7.9 per cent, from 8.6 per cent previously.

"The Chinese economy grew slower, mainly because of policy challenges and high base effect from last year's third quarter. We expect that these two factors continue to be in play for the fourth quarter, which means slow growth of the Chinese economy will continue," Pang said. She added that the Covid factor would remain the same as China exercises a zero-Covid tolerance, but infrastructure investments from the public sector could support growth.

Goldman Sachs economists said policymakers push for higher coal production could help mitigate the electricity shortage, and add to industrial production growth in the next few months.

"Going into the fourth quarter, we expect a continued recovery of services and consumption activities (barring major waves of Covid-19 outbreaks), and industrial production growth might also improve at the margin should coal supply increase and power shortages ease."

One uncertainty, however, is a colder-than usual winter, which might fuel residential demand for electricity and further curtail industrial activity.

"Overall, we expect Q4 GDP to grow at a 6 per cent annual rate (quarter-on-quarter)," the economists said, stressing that this assumes good virus control and limited spillovers from Evergrande.

Sung Eun Jung, senior economist at Oxford Economics, has downgraded the near term growth outlook for China on the back of the slow down in its residential real estate sector, electricity shortages, production cuts, and ongoing Covid caution.

For Singapore, whose major trade partner is China, the pain may be felt this quarter, Jung said.

"These are reasons behind our cautious near-term export outlook for Singapore despite a pick-up in export momentum in recent months. We forecast the quarterly momentum of export volumes will be cut more than half in the fourth quarter after a momentary rebound in the third quarter. Thereafter, we expect the momentum will gradually rise again and peak in the third quarter of 2022.

"In general, we expect the negative impact of China's downturn on Singapore's external sector will likely be felt in Q4 2021, with outlook improving as we progress into the second-half of 2022 especially as growth in the rest of South-east Asia region regains momentum."

Alongside a weakening trade momentum, Jung expects domestic demand growth in the city-state to accelerate next year as the economy reopens, albeit at a gradual pace.

"Therefore, we forecast domestic demand will be the main driver of growth in 2022 and forecast net trade (exports minus imports) will drag on headline growth next year as imports outpace exports."

Selena Ling, OCBC Bank's head of treasury research and strategy, said: "China is one of Singapore's top non-oil domestic export markets. So if their GDP is slowing, partly due to the ongoing power crunch, there may be some indirect impact on the manufacturing and trade side."