C Covid-19

Chinese Growth Hit The Brakes

17 August, 2021

Latest indicators suggest that Chinese growth has hit the brakes since the beginning of the third quarter. This sharp economic slowdown can be mainly explained by a spike of Covid-19 cases, which has pushed officials to implement restrictions that include local lockdowns. In the meantime, adverse weather conditions, a crackdown on property speculation, chip shortage, high commodity prices and new environmental policies have also added downward pressure on Chinese economic activity.

Chinese Officials Have Multiplied Restrictive Measures To Contain Delta Outbreak

Delta variant outbreak, first reported on July 20 in Nanjing, the capital of the eastern Jiangsu province, has rapidly spread to at least 17 provinces. This resurgence forced authorities to close tourist sites, cancel cultural events and flights during the peak holiday season.

Although the absolute number of cases was small compared to other countries, Chinese officials have also implemented another round of local lockdowns, transportation curbs (subways, bus, etc.) coupled with mass testing across the country (Wuhan, Zhangjiajie, etc.). Therefore, despite vaccinating more than half of its population, China has maintained its zero-tolerance policy.

Even though the trend has normalized downward since a few days, the situation is not expected to be prefectly under control before the end of the month. As an example, Kan Quancheng, director of Henan’s health commission, has pledged to contain the outbreak in the province “by the end of August“.

Other Factors Have Also Added Downward Pressure On Chinese Growth

China has also faced adverse weather conditions with record rainfall in Henan province last month causing floods that killed more than 300 people. Last week, Reuters reported “five cities in the central Chinese province of Hubei have declared “red alerts” after torrential rain left 21 people dead and forced the evacuation of nearly 6,000 people“. In addition, “the China Meteorological Administration warned that heavy rainstorms were likely to continue until this week, with regions along the Yangtze river vulnerable to flooding.

Crackdown on property speculation has also become a headwind for housing and local government funding. Yesterday, Bloomberg highlighted “China is widening curbs on the nation’s soaring home prices by temporarily halting land auctions in some major cities“. The article added “Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry. Their most recent moves have included halting private equity funds from raising money to invest in residential property developments. Still, land sales generated more than $1 trillion in income for local governments last year, creating a sensitive balancing act for Beijing.” A day earlier, Nikkei revealed China is toughening regulations around condominium transactions. It underlined that “Among the measures that authorities are taking are the introduction of eligibility rules for property purchases and the intervention in the secondhand market in big cities to prevent price inflation.

Another drag for Chinese growth emerged from the auto sector. Car production is significantly reliant on semiconductors and has been negatively affected by a shortage since a few months. According to research by Susquehanna Financial Group, chip lead times, the gap between ordering a semiconductor and taking delivery, increased to 20.2 weeks in July (the longest since the firm began tracking the data in 2017).

Higher commodity prices have also added pressure on small and medium-sized firms that are less able to pass on recent rises in raw material costs to buyers. As a reminder, factory-gate inflation increased by 9% YoY in July while consumer price index only rose 1% YoY.

Lastly, new environmental policies, designed to restrain carbon emissions, imply to lower steel production as soon as 2H21.

July Official Data and August High Frequency Indicators Pointed To A Sharp Economic Slowdown

Chinese growth slowed more than expected in July. On Monday, figures released by NBS showed retail sales increased 8.5% YoY in July, lower than the 10.9% predicted by economists. In the meantime, industrial output expanded 6.4% YoY versus the median estimate of 7.9% while fixed-asset investment grew 10.3% YoY in the first seven months of the year, compared with a forecast of 11.3%.

China’s tighter social restrictions to fight recent Covid-19 outbreak, mainly hit the services sector, especially travel. According to aviation data firm OAG., China’s overall scheduled air capacity fell 31.9% in the first week of August, the largest fall since Feb. 2020. These results look coherent with data from Airportia, which pointed to a drop until Aug. 14th. The crash in transportation already had repercussions on oil refiners. Bloomberg reported “State-owned China Petroleum & Chemical Corp., commonly known as Sinopec, is cutting run rates at some plants by 5% to 10% this month as compared with July levels.

China zero-covid policy has also affected shipping. The port of Ningbo-Zhoushan was partially shut down last week, disrupting trade at a time when businesses are ramping up for the Christmas holiday shopping season. According to Reuters, “on Tuesday, more than 50 container vessels were queuing at Ningbo port, China’s second largest marine centre, Refinitiv data showed, up from 28 on Aug. 10 when a COVID-19 case was reported at one of its terminals.

Latest developments come after typhoon activity impacted shipping at Yantian port, threatening to add further strain on global supply chains. In this context, export growth, which has been a key driver of China’s rebound from the Covid-19 slump in early 2020, is likely to slow further in August.

Meanwhile, chip shortage has reduced car production. The lack of supply dampened sales, which slid, on a YoY basis, for a third consecutive month in July. As a result, the China Association of Automobile Manufacturers (CAAM) said that sales for the rest of 2021 are expected to be below relatively high year-ago levels.

Furthermore, crackdown on property speculation is likely to hit private real estate investment and local government funding, also leading to fewer public investment.

Finally, Chinese crude steel production fell 7.0% YoY to 86.8 million tons in July, according to the NBS. Over the first seven months of 2021, China’s mills produced 649.3 million tons, still up 9.5% compared to the same period last year. It suggests further drastic cuts should come in the coming months in a sector that accounts for around 15% of China’s emissions.


One of the key downside risk for Chinese growth, namely delta outbreak, materialized. The shock has been amplified by other factors and will probably affect other Asian economies, which have already faced a difficult economic situation. As a matter of fact, the share of vaccinated population is low compared to Western countries while zero-Covid policy remains in place in several areas, resulting in tough and costly restrictions. In this context, negative surprises are likely to continue in the short term, pushing economists to revise downward their 2021 forecasts for both Chinese and global GDP. At this stage, it’s complex to give a precise estimate because it depends on the speed with which the outbreak will be under control in China and elsewhere. Furthermore, given that China zero tolerance policy should persist at least until the Winter Olympics in February 2022, it implies that the PBoC bias should remain tilted towards the accommodative side in the short term.