China’s economy is currently plagued with slump in property market along with energy crisis arising out of coal shortages due to which GlobalData, a leading data and analytics company, has revised down its 2021 and 2022 GDP growth rate forecast from 8.68% and 5.73% in June 2021 to 7.94% and 5.55%, respectively, in November 2021.

The government’s decision to slow down the pace of lending to the real estate sector to reduce the financial risks as major real estate companies like Evergrande defaulted on its debt payment may slowdown the pace of economic growth.

On the other hand, the shortage of coal increased the input cost of the manufacturing companies, which is driving up the inflation rate. The recent resurgence of delta variant of COVID-19 and the consequent lockdowns have also remained an area of serious concern. In Q3 2021, China’s economic growth cascaded to 4.9% (Y-o-Y) as compared to 7.9% (Y-o-Y) in Q2 2021 and 18.3% (Y-o-Y) in Q1 2021.

Gargi Rao, Economic Research Analyst at GlobalData, comments: “Manufactures are facing the problems of power outages, higher raw materials cost and subdued investment activities due to tight credit conditions. The policies to adopt zero COVID-19 strategy along with a drastic effort to reduce carbon emissions will likely cast a shadow on the economic growth prospects in the next quarters.”

Rao continues: “The Purchasing Managers’ Index (PMI) for manufacturing started slipping since March 2021 from 51.9 to 49.2 as of October 2021, indicating a contraction in manufacturing activity. Input prices for manufacturers rose steeply compared to output prices, which put a downward pressure on production. Supply constraints remained the major downside risk for investors and manufacturing giants.”

The overall business confidence dwindled since August 2021 largely due to weaker sentiment among investors and firms amid power shortages, rising input costs and resurgence of delta variant of COVID-19. The industrial production growth slowed down from 8.8% (Y-o-Y) in May to 3.1% (Y-o-Y) in September 2021 owing to global chips shortages. Demand remained sluggish as new export orders dropped.

Furthermore, soaring coal prices and inputs costs squeezing the overall profits of the firms have put inflationary pressures on the economy. As of September 2021, the producer price index shot up to 13.5% (YoY), according to National bureau of statistics. Higher production costs and slowing economic growth might increase the risk of stagflation in short term.

Rao concludes: “The need of the hour is to critically balance the goals of maintaining economic stability through reduction of input costs and containing the spread of COVID-19. Short-term shocks due to energy crisis and chips shortage seem inevitable. However, policymakers need to bring in reforms aimed at long-term growth which can boost both consumer confidence and business confidence.”