China’s retail sales growth for the month of August came out at a disappointing 2.5 percent when compared to a year back. This is well below the seven percent growth rate expected by analysts polled by Reuters. Experts believe that the lower sales growth is due to consumers scaling back spending during the summer holiday break. The 2.5 percent growth is also far lower than the 5.2 percent increase seen in July.
“It’s hard for retail sales to return to the pre-COVID growth under the zero-tolerance strategy… How long the government would stick to the strategy depends on the vaccination ratio and vaccine efficacy. At this stage, it seems that policymakers will stick to the zero-tolerance strategy at least before the Olympics [this coming] Feb,” Larry Hu, chief Chinese economist at Macquarie, said in a note.
The government had imposed strict COVID-19 restrictions in August in several places following incidents of Delta breakouts. Beijing’s “zero-tolerance” approach prioritizes combating the pandemic over the economy, a policy that ends up cramping economic activities every time a few COVID-19 cases pop up. The Chinese government had imposed local lockdowns and travel restrictions during most of the summer holidays, which is said to have negatively impacted the normal consumer spending spree.
Other areas of the economy are also not looking good. Data released by the National Bureau of Statistics reveals that industrial production growth was slightly below expectation for the month, up by 5.3 percent against an expected 5.8 percent growth. This is lower than the 6.4 percent increase in July. Industrial production measures activity in the mining, utilities, and manufacturing industries. The jobless rate in China was registered at 5.1 percent in August, unchanged from the previous month. Beijing has set a target to generate 11 million new urban jobs this year.
Revenues in the catering industry fell by 4.5 percent in August, registering a sharp decline from July’s growth rate of 14.3 percent. “The hit to service activity from last month’s virus outbreak was even larger than we, and other forecasters, had anticipated… The rest of the economy held up better, although the headwinds facing the property sector appear to be intensifying,” Julian Evans-Pritchard, senior China economist at Capital Economics, said to South China Morning Post.
Fixed asset investment for the first eight months of the year is up by 8.9 percent as compared to 2020. The measure is a gauge of expenditure on items like infrastructure, machinery, equipment, and property. During the January-July period, fixed asset investment had been up by 10.3 percent.
For the second quarter of 2021, the Chinese economy grew by 7.9 percent compared with the same period last year. During the first quarter, the economy had expanded by 1.7 percent.
Financial services company AZN has downgraded their 2021 GDP growth forecast for China from 8.8 to 8.3 percent. “Although they are unlikely to inject massive stimulus to boost headline growth, the central bank will maintain an easing bias,” said ANZ analysts in a note. Goldman Sachs has reduced their growth forecast from 8.6 to 8.3 percent.
Property and bond markets
At a news conference, Fu Linghui, spokesperson for the National Bureau of Statistics, pointed out that some large-scale real estate companies have encountered “difficulties” in production and operation activities. In the first eight months of the year, construction investment had contracted by 3.2 percent, which many see as a reflection of Beijing’s tightening control of the property market.
The construction slowdown has affected related industries as well, including the steel sector. China’s steel output was at the lowest in 17 months during August. This has negative consequences for the global economy as it reduces Chinese demand for iron ore.
In an interview with Bloomberg Quint, Lu Ting, the chief China economist at Nomura Holdings in Hong Kong, says that markets have “significantly underestimated” the scale of growth slowdown in the second half of the year. He believes that the Chinese regime will continue with its strategy of taking on short-term pains while seeking long-term gains. Lu expects Beijing to maintain its property restrictions.
Chinese authorities have imposed stringent regulations on how property developers can use debt to expand their business. The decision has hit several real estate firms hard, including one of the leading companies in the sector China Evergrande that had recently warned that it could default on its loans. The construction sector and related industries account for over a quarter of China’s GDP.
Real estate investment during January-August grew by 10.9 percent, which is lower by 0.3 percent when compared to the first seven months of the year. Real estate related consumption remains weak, with sales of furniture, decoration, construction items, and home appliances falling by five percent in August.
Meanwhile, China’s debt numbers are triggering concerns. The national debt level is now nearly four times the country’s GDP. A rising number of corporate bond defaults over the past 18 months have added to the worries.
The total number of defaulted corporate bonds in China in the first half of the year was 62.59 billion yuan ($9.73 billion), which is the highest for this period since 2014. Defaults by state-owned companies account for over half of it. In 2020, the total bond defaults were at 146.77 billion yuan ($22.82 billion), a massive leap from 2014 when such defaults only came to 1.34 billion yuan ($210 million). Moreover, no state-owned companies had defaulted back then.
According to Larry Hu, chief China economist at Macquarie, many local government financing vehicles (LGFV) are now in a position that they cannot even pay interest on loans. LGFVs are companies that are usually wholly owned by regional and local governments. These are typically set up to fund infrastructure projects.
“The year of 2021 is a window to break implicit guarantee, as it’s the first time in a decade that policymakers don’t have (to) worry about the GDP growth target. As a result, they could tolerate more credit risk,” Hu said. He believes that it is only a matter of time before LGFVs default on their bonds.