Doha: Since the onset of the global pandemic and its subsequent slowdown last year, China has been on the road to recovery for more than six quarters. In the first quarter of 2021, China’s growth peaked with an overall record growth of 18.3% in real terms, mainly driven by investment in infrastructure and the export sector. Over the past two quarters, however, China’s economic growth has failed to keep pace with the previously observed record speed and has since started to flatten out and even decelerate. Given the size of the economy, a moderation in China’s economic growth is likely to spill over into the global economy and impact other adjacent countries that are economically connected or integrated with China.
This analysis looks at the three reasons why growth in China is slowing and could slow further over the remainder of the year.
First, the withdrawal of stimulus measures by the Chinese authorities in late 2020 and early 2021 is starting to affect domestic demand, which in turn accelerates the cooling of the economy. Tightening of policies was essential, including fiscal and regulatory measures. On the fiscal front, the extraordinary advantages have expired and public investments have moderated.
On the regulatory front, the authorities imposed restrictions on credit growth in the real estate sector and created new rules for different technology industries, which slowed down investment. This helped moderate the growth of the economy, as household consumption remained relatively low and could not compensate for the decline in public spending and investment.
Second, the deleveraging of major real estate developers in China is spilling over into the wider domestic real estate market, dampening confidence in one of the country’s main economic sectors. The real estate sector, when measured in broader terms, including supply chain effects and tax revenues, accounts for around 25% of total GDP. The potential default of large real estate developers should further weaken the sector’s economic activity. In addition, the over-indebtedness of real estate developers could affect the domestic credit market, which would create additional challenges for investment growth. These two factors have a significant impact on growth.
Third, export growth, a key driver of China’s economic recovery so far, is now threatened by worsening supply-side constraints in the energy sector. Higher coal prices and shortages of other key commodities are causing power outages in several provinces. In order to ensure household energy supplies, the authorities are imposing electricity rationing on energy-hungry manufacturers. This situation could get even worse during the winter, when energy demand typically increases. As the government tries to remedy the situation with several measures, including easing regulations on power producers and coal miners, it remains unclear whether manufacturers will benefit from a stable power supply in the country. fourth quarter 2021. If the energy situation worsens, export growth will be even stronger. affected.
Altogether, the real estate and export sectors have been the main drivers of the Chinese economy since the COVID-19 shock. However, tightening policies and headwinds in real estate are already contributing to a significant slowdown. In addition, energy supply constraints are also starting to negatively affect the export sector. Therefore, we expect growth in China to decelerate further in the fourth quarter of 2021, before regaining momentum next year, as the impact of policy tightening fades and supply constraints recede. attenuate.