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China's growth disappoints, fuelling calls for more stimulus

Bloomberg • 6 min read
China's growth disappoints, fuelling calls for more stimulus
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China’s economic recovery lost momentum in the second quarter, putting Beijing’s growth target for the year at risk and adding to concerns about a slowdown in the world economy.

Gross domestic product grew at a slower-than-expected pace of 6.3% in the second quarter compared with a year earlier, when dozens of Chinese cities were in lockdown, but just less than 1% from the first quarter. Deflation is a major risk now, the data showed, with economy-wide prices declining for the first time since 2020, while youth unemployment climbed to above 21%.

The data intensified calls for more stimulus for the Chinese economy, with attention now shifting to a meeting later this month of the Communist Party’s Politburo, which will decide economic policies for the rest of the year. Beijing has hinted, though, that stimulus measures this year will likely be limited in scale, reflecting its relatively modest growth target of around 5% for the year.

Even that target is now at risk, according to economists at Citigroup Inc., who lowered their forecast for China’s growth this year to 5% from 5.5%. Morgan Stanley cut its projection to 5% from 5.7%, while UOB Ltd. and JPMorgan Chase & Co. see the same expansion this year, down from previous estimates of 5.6% and 5.5%, respectively.

Data for June released by the National Bureau of Statistics showed a slowdown in growth of consumer spending, which has been the main driver of China’s economy this year. Retail sales rose 3.1% in June from a year earlier, down from 12.7% in May.

“What we all expected was a consumption and service-led recovery. If that is sputtering, then there’s no engine left for the recovery,” said Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings. “We never want to read too much into one month’s data. But if the June data on consumption is representative, then that’s not a good sign.”

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To account for the base effects from last year’s lockdowns, economists have focused on quarter-on-quarter and two-year average growth rates. Both those measures showed a slowdown in the second quarter compared with the first three months of the year.

Highlights of the Data
Retail sales growth slowed to 3.1% year-on-year in June from 12.7% in May, missing economists’ prediction for a 3.3% jump

Industrial output rose 4.4%, compared with a projection of 2.5%, and up from 3.5% in May

See also: Feel the pulse of real China at the street level

Fixed-asset investment gained 3.8% in the first six months of the year from a year earlier, down from 4% in the January-May period, but higher than the 3.4% forecast by economists

The urban jobless rate was unchanged at 5.2% in June, while the youth unemployment rate climbed to 21.3%

Compared to the first quarter, GDP growth slowed to 0.8% from 2.2% in the first three months of the year.

Investment by China’s vast property sector also worsened in June from the previous month, a sign of ongoing pain in the housing market.

“Property is the key to resolving the various current problems,” said Jacqueline Rong, chief China economist at BNP Paribas SA. “The central bank needs to put a floor to the credit crisis among developers to help them survive.”

China’s benchmark CSI 300 Index of stocks closed 0.8% lower on Monday as Asian peers broadly dropped. It was the index’s first decline in three sessions. The onshore yuan weakened 0.46% at 7.1742 per dollar as of 3:51 p.m. local time.

China's Retail Sales Flatline | Retail demand is weak, undermining economy this year

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Finance ministers and central bank governors from the Group of 20 nations are meeting this week in India against the backdrop of slowing global growth. The world economy is expected to grow 2.8% this year, lower than its pre-pandemic pace, and recent high frequency indicators show weakness in manufacturing, the International Monetary Fund said last week.

While speculation has grown that Beijing will deliver more stimulus to the economy, officials are reluctant to drive up debt, especially in the property sector. That suggests any support measures may be smaller in scale than previous years and targeted toward specific industries.

The People’s Bank of China, which cut its key policy rate in June, refrained from easing policy on Monday, although many analysts expect a move in coming months.

“We do expect Beijing to introduce a raft of supportive measures in the second half of the year including two 10 basis-point rate cuts,” said said Lu Ting, chief China economist at Nomura. “However, these measures may not turn things around.”

Underlining the weak sentiment, fixed asset investment by private companies declined in June and the household savings rate remains elevated.

The GDP deflator, a measure of economy-wide prices, was negative in the second quarter for the first time since 2020. The “risk of deflation is serious,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

The NBS put a positive spin on the data, saying the it showed “good momentum” and used variations of the word “stable” or “stability” to describe the figures. Even so, it said “the domestic economy’s recovery and development foundation is still not solid yet.”

China Faces Deflation Risks with Slower Nominal Growth | Nominal economic growth lagged real growth for first time since 2020
Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group Ltd., said the data miss may prompt officials to accelerate fiscal spending to boost investment.

“There has been a lot of signals including conferences between the government and foreign investors and entrepreneurs, which suggest that follow up policy will come,” he said. “Fiscal spending will be the major focus in the next two weeks.”

Goldman Sachs Group Inc. economists said the magnitude of any stimulus will likely be smaller than in previous downturns, while HSBC Holdings Plc’s Frederic Neumann said support will be targeted, rather than broad-based.

“Overly stimulating demand in the short-term may prove counter-productive by stoking the build-up in debt and accentuating some of the economy’s imbalances, such as its reliance on a vast housing construction sector,” said Neumann, HSBC’s chief Asia economist. The focus remains on “putting the economy on a long-term sustainable trajectory, he said.

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