Nomura cuts China GDP forecast as power crunch drags down growth

• "Markets now are so perplexed by the fallout of the property sector that they may ignore Beijing's unprecedented curbs on energy consumption and energy intensity," Nomura's Chief China Economist Ting Lu said Friday.
• As a result, he expects China's GDP to grow by 7.7% this year, down from 8.2% previously forecast.
• Most economists haven't cut their 2021 China GDP forecasts yet, but are watching a rising number of drags on growth.

BEIJING — Nomura's Chief China Economist Ting Lu cut his forecast for Chinese GDP growth this year as factories shut down to comply with carbon emissions reduction targets.

"Markets now are so perplexed by the fallout of the property sector that they may ignore Beijing's unprecedented curbs on energy consumption and energy intensity," Lu said in a note Friday.

As a result, he expects China's GDP to grow by 7.7% this year, down from 8.2% previously forecast.

Chinese President Xi Jinping announced in September 2020 that China would reach peak carbon emissions by 2030 and become carbon neutral by 2060. That's kicked off national and local plans to reduce production of coal and other carbon-heavy processes.

Meanwhile, worries about indebted Chinese property giant Evergrande's ability to stay afloat has roiled global markets in the last week. The real estate market, along with related industries such as construction, accounts for more than a quarter of China's GDP, according to Moody's estimates published in a late July report.

Fitch on Thursday lowered its China growth forecast to 8.1% from 8.4% on expectations a slowdown in the property market puts pressure on domestic demand.

Other economists haven't cut their 2021 China GDP forecasts yet, but are watching a rising number of drags on growth.

• Macquarie's Chief China Economist Larry Hu said in an email Monday his 8.5% GDP estimate, set a year ago, is "facing downside risk now, given property slowdown and production cut."
• China Renaissance's Bruce Pang, head of macro and strategy research, said Monday the firm hasn't yet changed its GDP forecast of 8.4% either. But he said there could be a downward revision to 8.25% or 8.3% if the electricity shortage is prolonged, hitting not just energy-intensive industrial manufacturing but local livelihood and even services.
• Allianz subsidiary Euler Hermes' senior economist Francoise Huang said in an interview Thursday she is maintaining her GDP forecast of 8.2% for now, until she can get more clarity on "how much of [a] downward revision" she needs to make.

The central government in March set a much lower GDP target of over 6% expansion for the year. Analysts have noted policymakers are far more interested in the quality of economic growth than its pace.

"We believe it is unrealistic to expect China to maintain high and stable growth as Beijing delivers substantial shocks to both supply and demand sides," Nomura's Lu said in his report Friday.

Power supply crunch

On the supply side, he pointed to a "game changer" in mid-August when the national economic planning agency announced that 20 regions — accounting for about 70% of China's GDP — failed to meet carbon-related targets, prompting local authorities to quickly take action.

"Regarding demand shocks," Lu said, "China's recent, sweeping regulatory crackdown on internet platforms, fintech, video games, off-campus tutoring, ride-hailing, data privacy, food delivery, crypto miners and e-cigarettes have been significant. The crackdown on off-campus tutoring may be especially negative for growth in Q3 and Q4 this year, as the entire sector has been decimated"

He lowered quarterly GDP forecasts to 4.7% year-on-year growth in the third quarter and 3% in the fourth.

China's official release on third-quarter GDP is due out Oct. 18. The accuracy of government data is frequently doubted.

Spillover from Evergrande and real estate

Chinese authorities' efforts to reduce high reliance on debt in the massive real estate sector in the last year have sent shares of indebted developer China Evergrande tumbling. The company has remained silent on an $83 million interest payment on its U.S. dollar-denominated debt that was due Thursday. The firm has a 30-day grace period.

If Evergrande's troubles prompt a 10 percentage point slowdown in residential property activity, that could drag GDP growth down by roughly 1 percentage point, Morgan Stanley's Chief Asia Economist Chetan Ahya said in a note Sunday, citing analysis from the firm's chief China economist Robin Xing.

Ahya added the slowdown could result in a decline in private consumption and a drop in property investment that subsequently lowers fixed asset investment in related manufacturing sectors. "These spillover effects are creating downward pressure on growth at the same time that production cuts to meet energy intensity targets are weighing on growth," Ahya said. "The regulatory reset is weighing on corporate sentiment and consumption is softening because of intermittent Covid-related restrictions."

If the constraints on energy-intensive production remain, the Morgan Stanley analysts expect fourth-quarter GDP growth will be dragged down by about 1 percentage point. The investment bank currently forecasts 4.5% GDP growth in the third quarter from a year ago, and a slower 4% pace in the fourth quarter.

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Expecting policy support

As negative factors add up, analysts expect Chinese authorities to ease policy and support growth.

"The government has not loosened policies because the economic pressure is not high enough," Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in a note Sunday. "In particular, the unemployment rate has been relatively stable, and export growth has also been strong. The government may think they can afford to wait till the year end to loosen policies."

He noted that the overseas market is not nearly as worried about a hard landing in China's economy compared with previous declines in the MSCI China Index.

The drop in stocks this year has not affected the yuan exchange rate, Zhang said. "There [is] no sign of capital outflow, and the gap between the offshore [yuan] exchange rate and the onshore exchange rate did not widen. This shows that the current Evergrande incident has not caused panic on China's macro economy in the international market."

The MSCI China Index has fallen more than 18% so far this year. It tracks shares of Chinese companies traded in the mainland, Hong Kong and the U.S.

The offshore-traded yuan has fallen about 0.66% so far this year. Its gap with the onshore-traded yuan has remained within a range with an absolute value of 0.043 yuan, according to Wind Information.

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