China's economy is set to slow sharply as it grapples with the Evergrande crisis and weaker domestic demand, Barclays says

A resident cycles through the Evergrande changqing community in the rain on
Investment in China's huge property sector is slowing, Barclays said. Getty Images
  • Chinese growth slowed sharply in the third quarter as property investment cooled, Barclays said.

  • The bank is more pessimistic about China as the country deals with Evergrande and an energy crunch.

  • It cut its 2021 China growth forecast to 8.2% but said it could fall to 6% in a worst-case scenario.

Data released Monday will show that the Chinese economy slowed sharply in the third quarter as investment in the enormous property sector weakened, Barclays has predicted.

Barclays analysts, led by chief China economist Jian Chang, said in a recent note that gross domestic product likely grew 4.6% in the third quarter compared to 7.9% in the second.

Like other banks such as Goldman Sachs, Barclays has become more pessimistic about China's economic prospects over the last month as the country grapples with the looming default of highly indebted property developer Evergrande, as well as a serious energy crunch.

It recently said that "spillovers" from the Evergrande crisis could lead to a sharp slowdown in lending and drag on GDP growth by 2 percentage points this year.

Barclays in September cut its overall 2021 growth forecast for China to 8.2%, from an earlier estimate of 8.4%. But it said this month that growth could fall to as low as 6% in 2021 if China continues to limit energy production for climate reasons in the face of a global fuel crunch.

In a new note published Friday, Barclays analysts said credit grew at the slowest pace since at least 2003 in September as household loans and home sales cooled. This points to weak investment in the property sector, which has traditionally been a big driver of economic growth.

China's real estate sector is being convulsed by the Evergrande crisis. It's the most indebted company in the world, owing more than $300 billion, and has links across the Chinese and global economy.

Read more: 3 reasons China in the 2020s could start slowing dramatically like Japan in the 1990s

The government is waging a war on debt and is trying to "rebalance" the economy towards consumption-driven growth. Less lending has seen home sales cool sharply and the new scrutiny on debt levels has driven up developers' borrowing costs.

A host of other problems has contributed to the slowdown in the third quarter, Barclays said. "We think disappointing imports, lower-than-expected CPI inflation, and slowing credit growth point to weakened domestic demand," its analysts wrote in a note on 15 October.

Barclays estimated that import growth slowed dramatically to around 9% in September, compared with 25% in August. It said imports of iron ore and copper were particularly weak - a visible effect of slowing property investment.

Soaring global energy prices - powered by the reopening of global economies - have also forced some factories to shut down. China is limiting production of fossil fuels, such as coal as it tries to hit climate targets.

Barclays expects economic growth to cool sharply in 2022 and 2023, with GDP expanding 5.5% and 5.3% respectively. China was notching up annual growth rates of more than 10% in the 2000s.

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