Power shortage weighs down China’s growth
- GDP growth slowed to 4.9% YoY in 3Q from 7.9% in 2Q amid Delta outbreak and power shortage
- Industrial production took the hardest hit
- Lingering debt crisis in the property sector weighed on investor confidence
- GDP forecasts for 2021 and 2022 are downgraded from 8.8% to 8% and from 6.0% to 5.3% respectively
- Implication for investors: Another 50bps RRR cut is in-sight
GDP growth slowed markedly to 4.9% YoY in 3Q21 from 7.9% in 2Q21. On a QoQ basis, it decelerated to 0.2% from 1.3%. Given the slower recovery momentum, economic growth will likely slow further to 4.0% in 4Q to conclude the year at around 8%. Annual GDP projection for 2022 is also lowered to 5.3% (from our 6% forecast made previously).
Industrial activities took the hardest hit from electricity shortage. Their growth rate has in fact slowed for 7 straight months, with a September print of 3.1% YoY (from 5.3% in August). Power crunch is affecting about 20 provinces and regions (contributing to over 66% of GDP). Consequently, soaring commodity prices compress profit margin of downstream industries. Gap between PPI and CPI is standing at all time high of 10% points, the highest level last seen in 1993 (12% points). Profits of textile, garment, and automobile fell to single-digit turf, comparing in pale to triple-digit growth of coal mining industry. More than 100 companies have notified the stock exchanges regarding products suspension. Manufacturing PMI dropped to contraction zone for the first time in the past 18 months at 49.6 in September. Production and New Order sub-indicators are below the 50 threshold line at 49.5 and 49.3.
Weaker exports demand will also eventually feedthrough to slower industrial activities ahead. New export order PMI fell further to 46.2, the lowest level in the past 14 months. Gradual re-opening of manufacturing plants in advanced economies regained some orders from China factories. Exports rose by 28.1% YoY in September, compared to 25.6% in August. Yet, this is partly due to the surging cargo traffic cost. The benchmark shipping rate is now 8-10 folds higher than the pre-COVID levels.
On a brighter note, retail sales rebounded to 4.4% YoY in from 2.5% YoY in August as the delta variant COVID was largely contained quickly. CPI only dropped slightly from 0.8% to 0.7%, while Core CPI remained steady at 1.2%. Unemployment rate fell from 5.1% to 4.9%, the lowest level since end-2018. Traffic data in major cities during the week long National Day Holiday returned to pre-COVID level. Yet, stock market consolidation, as well as property market correction in major cities may add downward pressure on spending powe.
Fixed asset investment also slowed from 8.9% YoY YTD to 7.3%. In particular, infrastructure investment stayed low at 1.5% comparing to 2.9% of the the previous month. Meanwhile, real estate investment slumped further amid stringent measures including property price control (both primary and secondary markets), alongside abolishment of School District Houses. Stringent execution of “Three Red Lines” imposed on property developers, and fading state guarantees on bonds default continued to weigh on investor confidence. Aside from the lingering concern over Evergrande, a number of developers are now on brink of default. Sales of top 100 property developers already dropped by 36% YoY. Yield to worst of China high yield bond already reached 20%, even higher than level last seen during the COVID. Share price of Sinic and Fantasia Holdings Group (both trading suspeneded) plunged by 87.3% YTD, 55.4% respecrively. Over the past week, Morden Land China annouched that they may delay repayment of one of its bond to be matured on 25 Oct. Its share price also dropped by 55.3% YTD. Reportedly, the listed company may sell one of its property management companies First Service (trading is currently suspended) for debt repayment.
That said, both fiscal and monetary supports would be necessary. The local government will continue to speed up bond issuance to fund infrastructure projects. Local government special bond issuance YTD finally reached 92.5% of the annual quota. On the monetary policy front, the PBOC is expected to inject liquidity into the system via different channels to relieve the funding pressure ahead. M2 growth had been hovering around 8.2%-8.3% in the past few months, which is its far below nominal GDP growth. Liquidity injection is expected to step up in the next few months. In fact, net injection through MLF reached RMB1200bn in the past two months. The PBoC also mentioned the two “protection” in its 3Q meeting – “protecting the healthy development of property market” and “protecting the interest of property consumers”. Accordingly, commercial banks in 1st and 2nd tier cities have started lowering mortgage rates. We also expect another 50bps RRR cut will be announced this month.
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