China’s economy faced a series of crises in Q3 2021. Restrictions were imposed across a range of regions early in the quarter to counter a major COVID-19 outbreak, which impacted economic activity. Later in the period, fuel shortages and energy policy targets led to electricity shortages in a range of provinces. Finally, the likely default (and eventual collapse) of property developer Evergrande fuelled fears of financial contagion. There is uncertainty around how long the impacts of these issues persist – with the potential to negatively impact growth in Q4 as well.
Overall, headline GDP increased by 4.9% yoy in Q3 – down from 7.9% yoy in Q2. Given the weakness in Q3, we have lowered our full year forecast for 2021 to 8.3% (from 8.7% previously), while raising our forecast for 2022 to 6.0% (from 5.9% previously).
Growth in China’s industrial production slowed further in September – down to 3.1% yoy (from 5.3% yoy previously). Although growth has slowed across much of 2021, as base effects related to the industrial closures of early 2020 have eroded, this slowdown also reflected the impact of electricity shortages during the month, along with supply chain disruptions and slowing demand from the construction sector.
China’s real fixed asset investment contracted in September – falling by 10.1% yoy (from a 6.8% yoy decrease previously). There has been a notable slowing in real estate investment (with nominal investment contracting in September).
Another surge in exports saw China’s trade surplus widen once again in September – totalling US$66.8 billion (from US$58.3 billion previously). This was the third largest monthly surplus on record (behind the levels recorded in December and November 2020). The strong growth in exports to the United States (combined with relatively modest increases in imports) has the potential to reignite trade tensions between the two countries. China’s rolling 12 month trade surplus with the United States was US$379 billion in September – setting a new record high for the eighth month in a row.
Growth in China’s retail sales accelerated in September, as easing restrictions (related to the early Q3 COVID-19 outbreak) provided support. We estimate that real retail sales rose by 2.9% yoy in September (up from 0.9% yoy in August). While the direction of retail sales is encouraging, growth remains very weak when compared with pre-COVID-19 levels, and presents a drag to economic growth.
New credit issuance totalled RMB 24.8 trillion in the first nine months of 2021, a decrease of 16.4% yoy. Over this period, there has been a modest increase in total bank lending – up by 0.5% yoy to RMB 17.1 trillion – while non-bank lending has plunged, driven by steep declines in government and corporate bond issuance.
The PBoC has held the Loan Prime Rate (its main policy rate) stable at 3.85% since April 2020. Recent commentary from Governor Yi Gang indicates that the bank intends to maintain its “normal” policy settings for as long as possible, suggesting a further rate cut is unlikely except in an emergency.