Laura He
China’s economic recovery continued to lose steam in the second quarter of 2023, prompting urgent calls for more stimulus from Beijing.
The world’s second largest economy expanded by 6.3% in the April to June months from a low base a year ago, according to data released by the National Bureau of Statistics (NBS) Monday. The figure was below the expectations of a group of economists polled by Reuters.
Compared to the first quarter, gross domestic product (GDP) grew just 0.8% from April to June. It slowed significantly from the 2.2% quarter-on-quarter growth registered in the first quarter.
Last year, harsh Covid-19 lockdowns wreaked havoc in the world’s second largest economy, including in the financial hub of Shanghai.
The economy rebounded strongly in the first quarter of this year after the lifting of pandemic restrictions, with GDP growing at 4.5%.
However, a slew of economic figures in recent months suggests that momentum has faded.
Monday’s data, which showed a marked slowdown in consumer spending and faltering business confidence, reinforced the idea that growth has indeed lost steam.
“After a sugar injection in the opening months of 2023, the pandemic hangover is plaguing China’s recovery,” said Harry Murphy Cruise, economist at Moody’s Analytics, referring to the initial burst of pent-up demand after reopening.
The waning recovery has prompted Beijing to introduce some stimulus measures, but “more is desperately needed,” Cruise added.
How China copes with its slowdown is a concern for global investors and policymakers, including US Treasury Secretary Janet Yellen, who visited Beijing earlier this month.
“China is a very substantial importer from many countries around the world, so when Chinese growth slows, it has an impact on growth in many countries and we are seeing that,” she told reporters during a trip to India.
The Chinese yuan weakened after the release of the economic data. The offshore rate was down 0.3% from the previous day, while the onshore yuan dropped nearly 0.4%.
The Shanghai Composite Index declined 0.9%. South Korea’s Kospi and Australia’s S&P/ASX 200 were 0.4% and 0.1% lower respectively. Stock markets in Hong Kong and Japan were shut.
Four challenges
The Chinese economy faces a number of challenges.
Firstly, consumers are increasingly wary of spending.
Monday’s data showed that retail sales increased 3.1% in June, significantly lower than May’s 12.7%. It marked the slowest growth since December, when Beijing scrapped most of its Covid-19 restrictions.
Secondly, private businesses, the backbone of the economy and the biggest source of employment, are hesitant to hire or make new investments.
Investment in fixed assets like roads and infrastructure from the private sector shrank 0.2% in the first half, compared with the same period a year ago. This accelerated from a 0.1% drop in the first five months of this year.
By contrast, state-sector investment jumped 8.1% in the January-to-June period.
Youth unemployment hit another record high. The jobless rate for those ages 16 to 24 reached 21.3% in June, breaking the previous record of 20.8% set in May.
That rate could increase further, before falling gradually after August, NBS spokesman Fu Linghui told a Monday press conference. He said this was because a large number of college students and other young job seekers are expected to enter the labor market during the graduation season.
Thirdly, the property market is still mired in its worst downturn on record. Investment in the property industry plunged 7.9% in the first six months of this year. Demand is also weak, with sales down 5.3% in terms of floor area.
Lastly, a sagging global economy has added to China’s woes. According to customs figures released last week, exports fell 12.4% in June, the fastest pace in three years. Imports declined 6.8%, worse than markets had expected.
Targeted easing needed
To bolster growth, the People’s Bank of China (PBOC) has cut a handful of key interest rates to boost bank lending.
The government also extended tax breaks for consumers buying new energy vehicles through 2027, in order to encourage sales and production in the world’s biggest EV market.
Analysts say the measures aren’t enough.
“To counteract persistent growth headwinds, we expect more [targeted] easing measures in coming months, with a focus on fiscal, housing and consumption,” Goldman Sachs analysts said Monday.
Cruise from Moody’s also expects monetary policy easing in coming months.
Liu Guoqiang, deputy governor of the PBOC, told a press conference last week that the central bank will step up “countercyclical adjustments” to support growth.
“Countercyclical policies” refer to measures intended to counter the effects of the economic cycle. For example, officials may add stimulus to spur expansion during a recession or tighten bank lending during a boom.
He also dismissed market concerns about falling prices, saying the Chinese economy was not in deflation and will not show signs of the phenomenon in the second half of this year.
The comments came after official data released last week showed the consumer price index was unchanged in June, the slowest pace since February 2021. Producer prices fell at their fastest pace in more than seven years.
Liu asked for patience, saying measures rolled out earlier were working.
Rallying tech tycoons
Top Chinese leaders have also indicated a reversal in the way they regulate the country’s technology giants, which had been hammered by a sweeping crackdown that lasted more than two years.
On Wednesday, Premier Li Qiang met with executives from major internet firms including Alibaba Group (BABA), Bytedance and PDD (PDD). Li praised them as “trailblazers of the era,” and urged all levels of government to step up policy support for them.
The powerful National Development and Reform Commission issued a statement on Wednesday commending internet companies for their role in bolstering the economy. It named companies like Tencent (TCEHY) and Alibaba for their contributions.
On Friday, seven government agencies jointly published long-awaited rules regulating the country’s generative AI industry.
Some restrictions included in an earlier draft were loosened, in a signal that the government was taking a more tolerant and supportive approach to the nascent technology, as it competes with rivals in countries like the United States.
Chinese tech stocks rallied last week after the good news. The Hang Seng Tech Index was up more than 8%, the best weekly performance since December 2022.
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