Analysts expect that China’s GDP growth in the fourth quarter may yet rebound to above 5% as the government will likely further expand fiscal spending to boost domestic demand and investment. China’s GDP grew at 4.9% year-on-year in the third quarter, down from 7.9% in the second quarter. Xu Hongcai, Deputy Director of the Economic Policy Committee of the China Association of Policy Science, said the government has accelerated the issuance of special local government bonds and it is likely to loosen credit and financing policies for companies. “The prices of major commodities and raw materials will remain elevated in the fourth quarter and they are unlikely to drop substantially in the near term,” Xu said. “We’ll likely see a mild rebound of growth in the fourth quarter as the government will expand fiscal spending to shore up growth. It appears that policymakers will use every possible tool to avoid further deceleration of GDP growth.” It is important to understand the dynamics of the broader picture. Coal shortages, analysts said, were caused by a mix of factors including rising demand for power from industries amid robust economic recovery and export growth; low coal inventory; and the decline of domestic coal supply that was disrupted by extreme weather and strict restrictions on coal production to meet carbon emission goals.
The coal shortage ultimately led to China’s recent power crunch and electricity rationing in some regions. The rigid on-grid power price mechanism, under which the power price is allowed to fluctuate only within a certain range, exacerbated the power shortage as coal-fired power plants have little incentives to produce in light of soaring coal prices. As China is to enter the peak winter season for power consumption, the question is how long it would take for the pressure of power shortages to be eased and how much of an impact it could have on the Chinese economy. China’s policymakers have acted swiftly to rein in coal prices and ensure adequate supplies. While the country has been pushing for green development, coal still accounts for about 57% of China’s primary energy consumption. Higher prices of coal-fired electricity would mean higher costs for companies, especially those in energy intensive upstream industries, and could drive up prices of other raw materials, ultimately pushing inflation higher.
Economists at the China International Capital Corp said that growth of China’s factory gate inflation, which already hit a record high in September by rising 10.7% year-on-year, will likely remain above 10% in October. Meanwhile, growth of the country’s consumer prices could reach nearly 2%. CICC analysts also forecast that energy shortages could reduce China’s GDP growth rate in the fourth quarter by 0.1 to 0.15 percentage point. The National Development and Reform Commission (NDRC) has issued multiple guidelines since the end of September to stabilize both power production and consumption. The regulator has reformed the power pricing mechanism, expanding the fluctuation range to 20%, which could help reduce the losses coal-fired power plants have to bear. In addition, electricity prices for high energy-consumption companies will be set by the market and will not be subject to the 20 % ceiling, the NDRC said.
“Amid Beijing’s rising efforts to boost coal supply and mitigate power outages, we expect industrial production growth to rebound slightly to around 3.5% year-on-year in October from 3.1% in September,” Lu Ting, Chief China Economist at Nomura Securities, said. “We revise China GDP downward to 4.3% year-on-year in the fourth quarter from 4.5% year-on-year and we revise China GDP to 8.9% for the whole of 2021 from 8.7%,” said Iris Pang, Chief China Economist at Dutch bank ING, as reported by the China Daily.
