The Chinese economy has slowed down in recent times due to various compounding factors. Among these are the ‘potential bankruptcy’ of Evergrande Group and the current energy crisis, apart from the disruption from flooding and restrictions enacted due to the Delta variant outbreak. Against this backdrop, China’s construction industry growth rate has been revised down from the earlier projected rate of 7.7% to 7.2% in 2021, says GlobalData, a leading data and analytics company.

Willis Rooney, Economist at GlobalData, comments: “Responses to the Delta variant in Nanjing (late-July), and more recently in Fujian swiftly controlled these outbreaks, and subsequently economic activity suffered. The extensive flooding in Henan also checked the economic growth. However, the most concerning factors are the current electricity shortages and the crisis at Evergrande Group.”

The Evergrande crisis continues to deteriorate, with the developer missing bond payments on the 23 and 29 September. Evergrande’s collapse has, in part, been due to Beijing’s efforts to rein in rising debt levels amongst China’s real estate developers. Restrictions on annual debt growth under the ‘Three Red Lines’ policy, and limits on real estate loan exposure at domestic banks, have both contributed to the developer’s current liquidity crisis. While the delivery of properties to Evergrande’s considerable number of pre-sale homebuyers is expected to be prioritized, the crisis is expected to have softened residential demand in China.

The energy crisis has begun to noticeably impact the manufacturing sector, with the National Bureau of Statistics’ Manufacturing Purchasing Managers Index falling to 49.6 in September 2021, the first contraction of manufacturing activity since February 2020. Contributing to the crisis are thermal coal shortages and government emissions and energy intensity targets.

Disrupted coal output in Mongolia, the ongoing ban on Australian coal and elevated energy demand in H1 2021 have weighed on coal inventory levels. This increase in energy demand and generation also perhaps contributed to the failure of the majority of provinces and regions in China to meet their energy intensity targets in H1 2021, with some regions beginning to ration power in order to achieve their year-end targets.

Some acceleration of special bond issuance is expected through which the local governments fund infrastructure works, in response to the slowing of the Chinese economic growth. However, any noticeable benefit for the construction industry is unlikely to materialize until Q1 2022.

Mr. Rooney concludes: “With the economic headwinds mounting, GlobalData expects to see some acceleration of special bond issuance in the remaining months of this year. Issuance has been relatively subdued in the eight months through August 2021, with CNY1.84 trillion of special bonds issued out of the CNY3.65 trillion annual allocation.

“With the allocation yet to be fully utilized, local governments should have room to expedite spending, though a lack of suitable projects may limit their investment options. However, while investment on infrastructure is expected to increase, it is unlikely to reach the levels seen in 2020, with considerable local government debt levels still a concern in Beijing.”