Out of steam page 14

Debt threatens growth,

Thwarted by power outages, supply bottlenecks and Covid outbreaks, and dogged by concerns about the struggling property sector, China’s economy grew more slowly than expected in the third quarter.

Although the central bank governor said China was “doing well”, independent economists are predicting that the mounting array of headwinds buffeting the economy suggested a “deeper downturn” was likely and would lead to weakest growth recorded for more than a decade next year.

The world’s second-largest economy has staged an impressive rebound from the pandemic but the recovery is losing steam. Problems including faltering factory activity, power cuts in the crucial northern industrial heartland, and a slowing property sector – which accounts for up to 25% of GDP – have fanned speculation that policymakers may announce more stimulus measures in coming months.

While there have been fewer new construction projects breaking ground, chief among the concerns about the giant property sector is the future of China Evergrande Group, the country’s number two developer, which is struggling under a $300bn mountain of debt and has the potential to drag the whole economy in to a slump.

Evergrande has already missed three repayments on US dollar bonds held by overseas investors and trading in its shares on the Hong Kong stock exchange has been suspended since 4 October.

The crisis could reach a head this week when the 30-day grace period is up on the first tranche of repayments – worth $83.5m – that were missed in September .

Gross domestic product (GDP), meanwhile, expanded in the JulySeptember quarter, up 4.9% from a year earlier, the national statistics bureau said on Monday, but that figure was down from 7.9% in April-June. Economists had expected an increase of 5.2%. The result was the weakest reading since last year’s third quarter, when GDP also grew 4.9%.

However, more worryingly for Beijing’s economic managers, on a quarterly basis, growth was just 0.2% between July and September , the weakest recorded since quarterly figures were first published in 2010.

Yi Gang, the head of China’s central bank, brushed off the wider economic concerns and said default risks at some companies, including small and midsized banks, were down to “mismanagement”. Authorities were keeping a close eye on those companies so that the financial challenges they faced did not become a systemic risk, he said.

Despite setbacks from coronavirus outbreaks, China’s economy was expected to grow 8% this year, Yi told an online meeting of the Group of 30 – a not-for-profit body of bankers, regulators and academics – whose international banking seminar coincides with the annual meetings of the International Monetary Fund and World Bank.

“Economic growth has been slowed down a little bit, but the trajectory of economic recovery remains unchanged,” he said.

Julian Evans-Pritchard, a senior China economist at Capital Economics, said his consultancy’s “activity proxy” measure now pointed to a “sharp contraction” in GDP.

“Although some of the recent weakness in services is now reversing, industry and construction appear on the cusp of a deeper downturn.

“For now, the blow from the deepening property downturn is being softened by very strong exports. But over the coming year, as global consumption patterns normalise coming out of the pandemic and backlogs of orders are gradually cleared.”

The rumbling crisis at Evergrande and other major homebuilders drove debt market risk premiums on weaker Chinese companies to a record high last week and triggered a fresh round of credit-rating downgrades.

“The interest of creditors and shareholders will be fully respected strictly in accordance to law,” Yi said. “The law has clearly indicated the seniority of liabilities.”

Authorities would give the highest priority to the protection of consumers and homebuyers, while respecting the rights of creditors and shareholders, he said. The central bank was taking various steps to fend off financial risks, such as replenishing capital for small and midsized banks, Yi added.