China’s Economic Slowdown Heightens Call for Increased Stimulus Measures

China’s Economic Growth Slows, Heightening Pressure for More Stimulus

China’s economy expanded at a slower pace than anticipated in the second quarter of 2024, with growth decelerating to 4.7% from 5.3% in the previous quarter. This figure fell short of the 5.1% forecast by Reuters and marks the slowest growth since early 2023. The underwhelming performance has intensified calls for additional economic stimulus measures from Beijing.

The slowdown was notably driven by persistent weaknesses in the property sector and rising job insecurity, which have dampened consumer spending. Retail sales growth hit an 18-month low, as deflationary pressures led businesses to cut prices on a range of goods from cars to food.

Lynn Song, Chief Economist for Greater China at ING, commented on the disappointing GDP figures, noting, “The road to hitting the 5% growth target remains challenging.” He attributed the economic drag to a negative wealth effect from declining property and stock prices, alongside low wage growth that has shifted consumer spending from big-ticket items to basic necessities.

The property downturn deepened in June, with new home prices falling at their fastest rate in nine years, further impacting consumer confidence and constraining local governments’ ability to generate revenue through land sales. This has intensified the focus of an upcoming key economic leadership meeting in Beijing, where addressing debt issues and boosting consumer confidence will be pivotal.

The Chinese government aims for around 5.0% economic growth in 2024, but many analysts view this target as ambitious and likely requiring additional stimulus. Following the slower-than-expected growth in Q2, Goldman Sachs has revised its 2024 growth forecast down to 4.9% from 5.0%. The bank’s economists argue for increased policy easing, particularly in fiscal and housing sectors, to stimulate domestic demand.

Quarterly growth for the second quarter was a mere 0.7%, a drop from the revised 1.5% growth in the first quarter. To counteract weak domestic demand and the property crisis, China has increased infrastructure investment and funded high-tech manufacturing. Despite a dip in the yuan and stock market following the dismal data, share markets later rebounded on expectations of further stimulus measures.

The National Bureau of Statistics (NBS) attributed some of the growth lag to adverse weather conditions, alongside rising external uncertainties and ongoing domestic difficulties. The disparity between robust industrial output and sluggish domestic consumption continues to fuel deflationary risks amid mounting local government debt. Although strong export performance has provided some support, rising trade tensions pose additional risks.

Recent data showed mixed economic signals: factory output growth exceeded expectations in June but decelerated from May, and exports rose 8.6% year-on-year while imports fell 2.3%. Retail sales, however, grew only 2.0% year-on-year, missing forecasts and marking the slowest growth since December 2022.

Xing Zhaopeng, Senior China Strategist at ANZ, highlighted the weak retail sales as a key concern, noting that household consumption remains subdued due to salary cuts and high youth unemployment. Property investment plummeted 10.1% in the first half of 2024, with home sales by floor area declining 19.0%.

Bank lending data from June indicated further weakening demand, with some indicators reaching record lows. In response, China’s central bank governor recently reiterated a commitment to supportive monetary policies. Analysts predict a 10-basis point cut in the one-year loan prime rate and a 25-basis point reduction in banks’ reserve requirement ratio in the third quarter.

Citi analysts anticipate additional property-support measures following a Politburo meeting in late July. Earlier measures included allowing state-owned enterprises to purchase unsold completed homes and setting up a 300 billion yuan re-lending facility for affordable housing.

Harry Murphy-Cruise, Economist at Moody’s Analytics, suggested that while the need for reform is pressing, substantial policy changes might be limited due to potential political implications. “Big policy pivots can be seen as an admission of failure,” he said. “Assuming reforms remain modest, we expect China to barely achieve its ‘around 5%’ growth target for the year.”