China’s GDP to further decelerate in Q4 2021

China’s economy has faced headwinds from flooding, Covid outbreaks and power rationing in H2 2021. This resulted in a steeper-than-expected economic slowdown for the third quarter, says Wood Mackenzie, a Verisk business (Nasdaq:VRSK).

Wood Mackenzie principal economist Yanting Zhou said: “We forecast year-on-year GDP growth to further decelerate to 4% in Q4 from 4.9% in Q3. In addition, growth for 2022 will slow to 5.4% from 8.1% this year.

“Disruption to economic activity, including tightening of pollution controls ahead of the Winter Olympics, reoccurring Covid lockdowns and pressure from the dual controls policy, will contribute to slow growth over the next year.”

The Chinese government has tightened measures to control air pollution ahead of the Winter Olympic and Paralympic Games in February and March next year. Wood Mackenzie expects economic activity in Beijing, Tianjin, Hebei, Henan, Shanxi and Shandong to be impacted before and during the Winter Olympics. These provinces accounted for 23% of China’s GDP in 2020. The utilisation rates of pollution-intensive industrial sectors, such as steel, alumina, glass, cement, coking and coating, could drop. Road traffic could also be impacted, and this would in turn lead to softer demand for iron ore, coking coal, gasoline and diesel during the period.

China’s zero tolerance towards Covid cases is likely to continue to at least until H2 2022. Mobility has been directly impacted, with domestic air traffic reduced by around half during the widespread resurgences in August, October and November compared to months with no outbreaks. Inter-city highway traffic was also depressed during these periods. Meanwhile, new waves of Covid also slowed China’s consumption recovery.

In the short term, China faces further disruption from reoccurring restrictions as new cases arise. More importantly, it faces downside risk beyond 2022 if it maintains its zero-tolerance policy. In addition, the country’s competitiveness in global markets is at stake as it pares down in global investment and trade.

China’s dual-control system, which supports the country’s target to reduce its energy consumption by 13.5% and carbon intensity of GDP by 18% in 2025 compared to 2020 levels as detailed in the 14^th five-year plan, could lead to further power rationing in the coming months. While efforts to increase coal production have eased power rationing since October, the pressure to meet energy intensity and consumption targets may force local governments to order power rationing for industrial users towards the ends of coming quarters.

The dual-control system is expected to expedite the structural change of China’s industrial sector. In September, the NDRC issued ‘The improvement plan of the dual-control system on energy consumption and energy intensity’, tightening the approval of projects that consume higher than 50 ktce. Furthermore, no financial support will be provided to unqualified high energy consumption and high emission projects. As a result, investment in energy-intensive sectors could be muted.

Still, the dual-control system remains an essential policy tool to ensure China meets its carbon emission targets by 2030 and ultimately net zero by 2060.