Strict Covid-19 measures and power shortages were seen as crimping the expansion in the world’s second-biggest economy. Economists says that China’s real estate troubles are the main risk for the remainder of the year, especially the impact of Evergrande’s debt crisis on the industry and its fallout for the banking and insurance sectors.

Yearly growth estimates for Q3 range from 2.5% to 6%, lower than the 7.9% growth in the April-June quarter. On average, economists predict 0.2% growth on a seasonally adjusted, quarter-on-quarter basis – a significant drop from 1.3% in Q2.

Over one-third of economists who provided their seasonally adjusted quarterly growth estimate forecast a contraction for the July-September period. Shen Jianguang, chief economist for online retailer JD.com who sees a 0.1% decline in Q3, says China’s recovery is not assured and that the downturn accelerated in August.

“Taking into account the uncertainty of the epidemic, the adverse impact of power shortages, and production restrictions under the ‘dual carbon goals’, as well as regulatory tightening of real estate, there is an increasing downward pressure on China’s economy,” he said. Shen expects y-o-y growth in Q4 to drop below 5%.

Full-year GDP estimates average 8.3%, 0.3 percentage points lower than Nikkei’s previous survey in June. A number of economists cut their full-year growth forecasts recently, including Arjen van Dijkhuizen, senior economist at ABN AMRO Bank, who lowered his forecast of 9% to 8.3%.

He said Beijing’s “zero tolerance” of new delta outbreaks over the summer was a clear headwind for economic activity, especially in the services sector.

“The tightening of mobility restrictions and the reimposition of regional lockdowns right in the middle of the typical travel season obviously left its mark,” he said.

Barclays’ chief China economist Jian Chang also downgraded her full-year forecast from 8.5% to 8.2% to reflect the shock of the delta outbreak. But she expects a rebound in Q4, assuming the outbreak is contained.

Widespread power shortages in recent weeks also have affected the country’s full-year outlook. Wei Yao, chief Asia and China economist at Societe Generale, said Beijing has ordered production cuts in steel and aluminum, and halted electricity to some producers to control carbon emissions – measures that have stymied industrial activity.

Tetsuji Sano, chief Asia economist of Sumitomo Mitsui DS Asset Management, said that as local governments face rising pressure to meet decarbonisation targets, energy supplies will continue to be curtailed in the near term.

He expects the rise of producer prices to exceed 10% in the October-December period.

“The overaggressive moves to slash carbon emissions would add pressure to the already elevated input prices, putting downstream manufacturers and retailers under stress,” said Christina Zhu, economist at Moody’s Analytics.

Despite the downside factors, 2021 GDP growth is still anticipated to remain strong due to the low base of the 2.3% growth in 2020. But for 2022 and 2023, economists’ average full-year forecasts are 5.4% and 5.3%, respectively – falling short of 2019’s pre-covid growth of 6%.

“The normalisation of the Chinese economy is proving bumpier than expected, due to a strong regulatory drive and the materialisation of downside risks since the end of (the first half of) 2021,” said Francoise Huang, senior economist for Asia-Pacific at Euler Hermes.

When asked about the major risks for China’s economy this year, most economists cited “property market troubles” as being among the top three, followed by “new Covid outbreaks and variants” and “debt crunch and soured loans for banks.”

Celia Lam, economist at the Bank of East Asia, ranked property market troubles as the main risk for China’s economy this year, noting that Evergrande raises concerns about the indebtedness of other property developers.

“Although most property loans lent by banks are collateralised, in the worst scenario, if Evergrande defaults, some smaller developers may have difficulties refinancing their debts in the bond markets,” she said.

“A wave of defaults may occur that might (precipitate) a chain reaction in the financial sector.”

Lam added that the property sector accounts for a substantial share of China’s GDP, and tightening credit to developers and homebuyers adversely affects residential property investment and transactions.

Kenny Wen, wealth management strategist at Everbright Sun Hung Kai, also cited China’s real estate problem as the biggest risk this year.

He said some other high-debt real estate companies are facing difficulties under the ‘three red line policy’. If they collapse, other sectors such as the banking and insurance industries will also feel the chill.

“The most acute risk now stems from the Evergrande debt crisis,” said Arjen van Dijkhuizen, senior economist at ABN AMRO Bank.

“If not managed well, contagion effects to the real estate sector could worsen, with a potentially strong impact on the broader economy, given the importance of the property sector.”

Apart from the real estate sector, regulators have also imposed curbs on the tech and education sectors in recent months.

Carlos Casanova, Asia senior economist at UBP, sees Chinese policymakers pushing more “painful reforms”, as a favourable base effect in Q1 makes it easier for China to meet its 6% GDP growth target for 2021. But he cautioned about the danger of over-regulation.

“The risk here is that an overly ambitious reform agenda results in a miscalculation of risks, potentially jeopardising growth into 2022,” he said.

Ting Lu, chief China economist at Nomura, also said regulatory overhaul could affect investor sentiment, especially in the private sector.

However, Fan Xiaochen, director of the Economic Research Office at MUFG bank, believes the crackdown on internet platforms, as well as the education and entertainment sectors, could possibly redirect revenue away from monopolistic practices, which is beneficial to the goal of “common prosperity” in alleviating China’s income gap.

But the “common prosperity” call from Chinese president Xi Jinping could also dampen the economic recovery.

“Higher taxes and increased costs of doing business, as well as a perceived risk of further heavy-handed government interference, are likely to weigh on private investment,” said Tommy Wu, lead economist of Oxford Economics.

“There is a clear risk that the common prosperity drive ends up hurting economic growth.”