China’s Q3 GDP came in well below market expectations at 4.9% year-on-year (y-o-y), compared to 18.3% in Q1 and 7.9% in Q2. Although exports continued to hold up strongly, other parts of the economy decelerated quite sharply in Q3 due to lingering impact of covid and the government’s sweeping regulatory campaign. A serious energy shortage further weighed on China’s industrial sector.
In response to the sharp deceleration in growth, the government has started to adjust some of its policies. For example, it has removed many of the restrictions on domestic coal production and stepped up imports of the fuel. Although credit available to property developers remains tight, the monetary authority seems to have relaxed regulations on mortgage approvals, leading to a sequential rise in mortgage loans in both August and September.
But these moves represent policy fine-tuning rather than a U-turn in the government’s broad direction. In our view, there has been a paradigm shift in the government’s policy agenda, with many new regulations here to stay. While recent measures should alleviate the acute coal shortage in the coming months, we do not expect the government to scrap its climate goals of reaching peak carbon by 2030 and carbon neutrality by 2060. Despite the rise in mortgage approvals, highly leveraged property developers are being required to reduce their debt and internet giants are expected to correct their anti-competitive practices and pay much more attention to the protection of user data.
On the fiscal policy front, the pace of local-government bond issuance has picked up speed since the middle of the year. At the end of September, total bond issuance year-to-date had almost caught up with the level seen at the same point last year, after having lagged significantly in H1. This will likely provide some marginal support to infrastructure investment but will not lead to a major boost on a year-over-year basis.
The People’s Bank of China may stay accommodative, providing liquidity as necessary to the financial system. However, we no longer expect a cut in banks’ required reserve ratios (RRR) in the rest of 2021. Instead, the central bank will most likely resort to open-market operations and other targeted tools to manage financial system liquidity.
In summary, despite the government’s recent moves to mitigate the downward pressure on growth momentum stemming from its own policies, the adjustments may not be enough to fully offset the growth headwinds that China is facing. As a result, we have decided to revise down our 2021 GDP forecast to 7.7% from 8.7% previously.
