The reading was the second weakest quarter over quarter growth on record since rates were published in 2010, according to Capital Economics’ Julian Evans-Pritchard, who says the firm’s own metrics point toward an even more pronounced downturn.
Industry, construction and services were all weak. Infrastructure spending softened, and there was a pullback in real estate investing as the property sector goes through its own tremors amid the debt travails of
China Evergrande Group
(ticker: 3333: Hong Kong) and others.
Though services could rebound this quarter, Evans-Pritchard sees the weakness in industry only deepening as factories need to ration power due to environmental restrictions and rising prices for thermal coal.
The property downturn has been offset a bit by the world’s pent-up demand for goods, which is boosting Chinese exports. But Evans-Pritchard cautions that foreign demand is likely to decelerate over the coming year as backlogs are cleared, with the firm expecting China to see just 3% growth, the slowest pace since the global financial crisis.
Next year is a big one for Beijing with the Winter Olympics and the 20th Party Congress and strategists expect authorities to be more proactive in clarifying its initiatives and increase efforts to manage the slowdown. Already, Beijing has picked up rhetoric and even engaged in some policy tweaks, with the People’s Bank of China last week noting that commercial banks had excessively limited lending to developers. That could help improve home-buyer confidence, according to a note from Gavekal Dragonomics analysts.
But there is reason for caution, with TS Lombard’s Rory Green worried about a higher possibility of a policy misstep, less effective stimulus and a weaker consumer recovery. Though policy makers are being more accommodative to help support consumer confidence, Green says it’s hard to ignore the blinking financial stress signals as key funding channels are under pressure. “Financing for development reliably leads investment by nine months, thus a large contraction in property is unavoidable,” he added.
That is troubling for an economy that is so heavily reliant on property, especially because it’s not clear if authorities’ targeted stimulus will be enough. That could keep investors wary about China, as well as China-related plays including some commodities in the near-term.
In fact, TS Lombard strategists Larry Brainard and Jon Harrison in a separate note caution that the growth slowdown in China and the threat of a stronger dollar increase risks for emerging market investors, especially exporters and commodity producers—a reason they have turned negative on Brazilian stocks though they are still positive on India and Russia.
Another risk: The supply shortages rippling through the world are tripping up emerging markets as well. Take the bottlenecks in semiconductor chips hobbling the auto sector—and countries like Mexico and Hungary that are part of that supply chain. Add in the power shortages not just in China but also India and Brazil and Capital Economics’ team sees another challenge to economic growth—and pressure on policy makers who now have to contend with inflationary pressures even though their economies could use some stimulus.
It isn’t clear those concerns are baked into the market yet. The
iShares Emerging Markets
exchange-traded fund (EEM) was down slightly on Monday at $51.83 while the
MSCI China
ETF (MCHI) was up a fraction at $70.84. The
iShares MSCI Brazil
ETF (EWZ) fell 1% at $32.92.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
