China’s Self-Inflicted Slowdown Tests Beijing’s Reform Determination

As China leapt ahead of major rival economies after last year’s COVID-19-induced crash, Beijing saw an opportunity to push through tough measures targeting indebted developers, as well as industrial polluters and tech giants.

President Xi Jinping’s bold reforms are intended to reduce the economy’s dependence on property and debt, channel more resources into high-tech manufacturing, and create a greener and more egalitarian economy.

But the slowdown in the pace of the world’s second-largest economy highlights the risks and tests Xi’s determination to implement his plans.

Growth in the third quarter slowed to 4.9% annually, the slowest in a year. However, policymakers are unlikely to falter in their attempts to address what they see as long-term risks and distortions in the economy, according to analysts.

“The slowdown is mainly driven by policies … (but) Beijing is willing to make concessions”Said Dan Wang, chief economist at Hang Seng Bank (China).

Construction starts have slumped amid efforts to cool down the real estate sector, where the Evergrande Group debt crisis has raised concerns about broader financial contagion.

Industrial production was held back by energy targets, as well as cuts amid a coal shortage, exacerbated by mine closures and safety inspections. China’s “zero tolerance” strategy to tackle COVID-19 has also weighed on consumption.

These government policies may have slashed quarterly growth by 0.7 percentage points, according to Nie Wen, an economist at the Shanghai-based Hwabao Trust.

Chinese leaders pledged last December to take advantage of the window created by the economic recovery to focus on structural reforms.

Setting a more modest and flexible growth target, “above 6%”, For this year it also gave them ample room for maneuver, as many analysts expect growth of around 8% in 2021 despite the slowdown.

Amid Xi’s drive to create what he calls “common prosperity”, Regulatory actions targeting technology, education, and entertainment have disrupted the vast online sector and devastated the for-profit tutoring industry, raising questions about the role of the private sector in the economy of China.

Beijing projects confidence and has not signaled any major policy changes to cope with the slowdown. Prime Minister Li Keqiang said last week that China has extensive tools to deal with economic challenges.

Policymakers, fearful that a housing bubble could undermine the country’s long-term rise, will likely continue to curb rampant borrowing and speculation, but could soften some tactics, political sources and analysts told Reuters.

“Much more damage will be needed to financial markets and the real economy before Beijing is willing to undo some of those brakes.Nomura analysts said in a note. There may be one more relaxation “marginal“Of the real estate measures in cities facing higher tax burden, said Hang Seng’s Wang.