Chinese policymakers react after Q3 economic data point to slowdown

The resurgence of the pandemic, rising energy and commodity prices coupled with supply chain disruptions have started to take a toll on China.

China, historically responsible for the bulk of global growth, barely grew +0.2% q/q in Q3 (or 4.9% y/y). Slowing Chinese growth has far-reaching consequences and impacts especially in the APAC region.

We believe that Beijing policymakers are likely to enact further monetary easing and fiscal stimulus before the year end, most likely after the Sixth Plenum held next month.

Coal shortages and power constraints create headwinds

While we are far from stagflation in the Chinese economy, other headwinds remain a drag on growth and could have further room to run in the near term. September’s weak industrial production, +0.05% m/m, was hit by coal shortages and power constraints. Industrial output takes up 65% of the electricity supply in China and is likely to face further production restrictions and higher energy prices.

Even though China’s September exports unexpectedly grew +28.1% y/y, it’s possible that production could take a hit in the coming few months due to the electricity constraints. In response, the government has reversed policies that led to the electricity outages and normal supplies should resume in the next quarter.

Real estate sector to face headwinds

China’s real estate sector is also faring better than expected – growing at pre-COVID levels of +7.2% in September (average 2-year growth rate) most likely due to a post-lockdown (July-August) surge in demand. This could be a dead-cat bounce since property developers continue to face multiple financing headwinds.

Recent headlines surrounding certain developers’ bond payment woes could further exacerbate the ability for developers to tap the debt markets. It’s likely that the government will orchestrate a managed slowdown for the sector and that the contagion risks may be kept at bay. We don’t think that fixed asset investments will be a meaningful driver for China’s economic growth over the next 12 months. 

Consumer sentiment to rebound by mid-2022

On a brighter note, consumption activity picked back up in September, with retail sales +4.4% y/y and +0.3% m/m basis. Still, household spending continues to be below pre-COVID levels. The most recent mid-autumn and national holiday spending were just 80% of 2019 levels.

We don’t think domestic spending will pick-up anytime soon as households remain cautious about the property sector and the pandemic’s unpredictable path. We do expect consumer sentiment and confidence to rebound by mid 2022 once the real estate sector stabilizes and China’s pandemic health policy evolves from its rapid vaccines rollout.     

Policymakers ready to act to support growth

In the face of property market downside risks, weaker economic activity and a plethora of regulatory oversight measures, it’s important to remember the Beijing policy “put” - which has been just as important as the “Fed put” to global markets and the economy over the past several years.

Unlike most other major economy policymakers, Chinese policymakers have been able to save most of their policy dry powder due to their early containment of the pandemic. Already, they’ve started to mobilize through liquidity injections in September to quell market volatility from the property and financial sectors. These measures have been quite effective in stemming contagion risks so far.

Beijing policymakers will meet at the Sixth Plenum next month and its possible that the government will outline additional easing monetary and fiscal stimulus measures to counter sluggish demand and property sector risks. 

Potential RRR cut and a boost in infrastructure spending

We continue to believe there could be a cut to the reserve requirement ratio (RRR) and a ramp up in local government infrastructure spending over the next quarter. The growth in infrastructure investments remains weak, only at 0.4% y/y in September. It’s possible to see a small policy shift over the next month as policymakers make more fiscal space for a rebound in infrastructure spending.  

China’s economy continues to be in a mid-cycle slowdown though the government has ample tools in its policy toolkit to combat the growth headwinds. With possible upcoming stimulative policies, we believe infrastructure investment and total credit growth could bounce back starting at the beginning of next year. As China heads into its all-important 20th Party Congress late next year, we believe that the government will do everything it can to ensure economic, political and social stability.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

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