China’s economic growth slowed more than predicted in the second quarter, increasing the likelihood of initiatives to boost growth from top officials meeting in Beijing this week.
According to the National Bureau of Statistics, the world’s second-largest economy grew by 4.7% in April-June compared to a year earlier. This growth rate was lower than the 5.3% seen in the March quarter and the 5.1% economists had forewarned.
The property sector continued to decline, with new commercial building sales down 25% in the first half of 2024.
Retail sales in June dropped by 0.12% from May, underlining weak consumer sentiment, which could hamper China’s ability to achieve its full-year GDP growth target of approximately 5%.
The relatively disappointing quarterly performance was compensated by a record trade surplus of nearly $100 billion in June alone, attributed to increased exports of manufactured goods.
The prospect of rising trade barriers, especially if Donald Trump is re-elected as US president later this year, adds anxiety to China’s leaders to restore domestic growth.
The data was released when senior Chinese officials were summoned to Beijing on Monday for a crucial political gathering to introduce significant economic policy changes.
“Addressing these (economic) trends should be a priority at this week’s third plenum,” commented Harry Murphy Cruise, an economist at Moody’s Investor Services.
However, the five-yearly event might disappoint those anticipating significant economic reforms since “major policy shifts can be seen as acknowledging failure, which risks losing face” in China, he remarked.
“Instead, we expect minor policy adjustments to enhance high-tech manufacturing and some limited support for housing and households.”
China’s President Xi Jinping will preside over the ruling Communist Party’s discreet gathering, with few indications about potential topics.
In June, state media suggested that the postponed four-day meeting would “mainly focus on issues related to further comprehensively deepening reform and advancing Chinese modernization,” with Xi mentioning plans for “major” reforms.
Analysts are optimistic that these promises will lead to necessary economic support.
“The forthcoming plenum cannot arrive soon enough,” wrote Sarah Tan and Harry Murphy Cruise for Moody’s Analytics last week.
They indicated that Beijing should take decisive actions to reform the property sector, ease restrictions on internal migration, enhance high-skilled job opportunities for graduates, and adjust the tax system to alleviate local government debt.
However, they warned that leaders would “likely not” implement sweeping reforms, opting for “a modest policy tweak to boost hi-tech manufacturing and a few measures to assist housing.”
The People’s Daily, the Communist Party’s official newspaper, seemed to validate those tempered expectations by stating last week that “reform is not about changing direction, and transformation is not about changing colour.”
Ting Lu, chief economist for China at Nomura, implied that the meeting was “meant to generate and discuss big, long-term ideas and structural reforms instead of making short-term policy tweaks.”
The third plenum has historically served as a platform for the party’s top leadership to announce significant economic policy changes.
In 1978, then-leader Deng Xiaoping utilized the meeting to present market reforms that set China on a rapid economic growth trajectory by integrating it into the global economy.
More recently, following the closed-door meeting in 2013, leadership dedicated to granting the free market a “decisive” role in resource allocation, along with other broad changes to economic and social policies.
Officials have been clear about their intent to pivot the economy away from state-funded investment and focus instead on growth driven by hi-tech innovation and domestic consumption.
Nonetheless, economic uncertainty perpetuates a negative cycle that keeps consumption persistently low.
One of the most urgent challenges facing the economy is the struggling property sector, which has historically been a significant growth driver but is now saddled with debt, leading several top firms toward liquidation.
In recent months, authorities have taken steps to ease pressure on developers and restore confidence, including urging local governments to purchase unsold homes.
NAB senior economist Gerard Burg pointed out that the property sector has contracted year-on-year for the past 28 months.
Investment in real estate dropped by 7.4%, a significant increase from May’s 4.7% decline compared to a year ago.
“Conditions in China’s residential property sector remain predominantly negative, with sales decreasing by 14.3% year-on-year in June, while construction starts fell by 18.3%,” Burg noted.
In June, adjusted for inflation, retail sales were 1.8% higher than in 2023.
This marked the weakest performance since December 2022, when results were negatively affected by the Omicron wave of COVID-19 and the abrupt end of zero-COVID policies.
“This continues to highlight the soft domestic demand conditions that have lingered since the pandemic,” he stated.
Analysts believe that much more action is required for a complete recovery, as the economy has yet to rebound fully over 18 months after the adverse effects of COVID-19 restrictions were lifted.
