China’s growth likely slowed ahead of key economic meeting
CHINA’S economic growth likely weakened in the second quarter, with headwinds adding pressure on Chinese leaders to lift confidence at a twice-a-decade policy meeting next week.
Data due Monday (Jul 15) is expected to show the world’s second-largest economy grew 5 per cent in the last quarter compared to the same period in 2023, according to economists surveyed by Bloomberg. That’d be the lowest rate in three quarters, even though it should keep expansion for the first six months of the year at 5.2 per cent, above Beijing’s annual goal of around 5 per cent.
Domestic demand was probably sluggish in June, with increases in production and consumption both expected to cool from May and the property sector continuing to contract.
The official economic indicators for June and the second quarter are scheduled to be released on the same day President Xi Jinping and the ruling Communist Party’s senior officials are set to start the much-anticipated third plenum after an unusual delay.
Authorities should make policy to address the property downturn, boost technology self-sufficiency and relieve local fiscal strains during the four-day conclave, economists said in another Bloomberg survey. As far as the critical real estate sector is concerned, most expect the gathering to focus on ramping up a May plan to have local governments buy unsold homes.
The economy could face even more challenges over the rest of the year. Rising trade tensions threaten to overshadow growth in exports. The central bank appears keen to cool a record-breaking bond rally to contain the risks of a bubble. Heavy debt burden prevents local governments from making new investment to stimulate growth.
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Gross domestic product growth may decelerate “markedly” to 4.2 per cent in the second half of the year “unless Beijing ramps up stimulus by speeding up fund injections significantly for completing unfinished pre-sold homes”, Nomura Holdings economists led by Ting Lu wrote in a Wednesday note. They anticipate the authorities will unveil “bolder measures” than what was announced in May to end the housing crisis.
Here’s what to expect when the figures are published and the economic and policy outlook in the coming months:
A broad slowdown
China’s economic recovery this year has been lopsided, with production outperforming consumption due to robust exports and favourable government policy towards manufacturing.
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But factory activity has lost some steam in recent months. Sectors plagued by excess capacity, such as the solar industry, are grappling with suppressed profits, with the government mulling rules to curb capacity expansion. Over-production has fed into deflationary pressure in the broader economy, which is holding businesses and consumers back from spending.
Key indicators for June are expected to show a broad slowdown in growth in the second quarter.
- Industrial production is forecast to rise 4.8 per cent in June from a year earlier, down from a 5.6 per cent growth in May.
- The increase in retail sales may have slowed to 3.3 per cent from 3.7 per cent in the previous month.
- Fixed-asset investment for the first half likely expanded 3.8 per cent versus a 4 per cent increase in the January to May period, set to be the slowest reading so far this year.
- Property investment probably plunged 10.5 per cent over the first half, deepening from a 10.1 per cent drop in the first five months and a new low since 2020.
- The surveyed urban jobless rate is expected to be 5 per cent as at the end of June, unchanged from the previous month.
Second-half outlook
Year-on-year GDP growth may slow further in the next two quarters of 2024 and reach 4.7 per cent in the final three months, according to the consensus forecast in a separate Bloomberg poll of economists. The full-year expansion will likely come in at 4.9 per cent, roughly in line with Beijing’s target.
Whether the real estate sector will turn around remains central to the prospects of the economy. More property-supporting efforts may come after the mid-year Politburo meeting late this month, Citigroup economists including Xiangrong Yu wrote in a note.
“We think the key is to bring a bazooka stimulus for the property segment so that troubled property assets can be systematically resolved, rather than to go through a piecemeal approach currently seen,” Heron Lim of Moody’s Analytics said of the plenum meeting next week.
Exports have been a rare bright spot in the economy this year but worries are growing about whether the momentum can be sustained. China’s trade partners across the developed and developing markets are raising tariffs against Chinese goods from steel to electric cars. Things could get worse as Donald Trump has threatened slapping 60 per cent additional levies on imports from China if he gets re-elected as US president.
Beijing promised to keep fiscal policy proactive to help the economy recover, but government spending has again lagged behind budget just like last year.
The authorities are also continuing a campaign to deleverage the vast sector of local government financing vehicles to reduce the so-called “hidden debt” risks regional authorities are exposed to. That could add more uncertainty to infrastructure spending for the rest of the year.
Commodities heavily tied to China’s infrastructure sector have tumbled on fears Beijing is not doing enough to reboot construction and manufacturing. Iron ore futures in China have slumped about 16 per cent this year, while steel rebar has lost 12 per cent.
“Implementation challenges, such as difficulty in finding suitable building projects, may be to blame. But this raises worrying questions about China’s capacity to use fiscal stimulus to spur growth,” economists including David Qu of Bloomberg Economics wrote in a note on Thursday.
Local governments, squeezed by tumbling income from selling land and a mounting debt stockpile, are getting desperate about bolstering their coffers. Some have turned to unconventional means such as hunting companies down for decades-old tax bills. Such measures are dealing another blow to businesses already struggling amid weak demand and fierce competition.
Monetary policy
Attempts by the People’s Bank of China (PBOC) to shore up long-end bond yields and its new mechanism to influence short-term borrowing costs have sparked fears of a potential tightening of liquidity. Meanwhile, the room for further rate cuts is limited given the downward pressure on the yuan and the thin net interest margins at Chinese banks.
The PBOC is due to announce its decision on Monday for the rate of the medium-term lending facility (MLF) – the current benchmark policy rate. None of the economists surveyed by Bloomberg expect a reduction.
The importance of the MLF rate is fading since it was adopted a decade ago as the PBOC seeks to shift to a short-term rate to guide markets, moving more in line with global peers such as the US Federal Reserve.
Some analysts expect the central bank to deliver a further cut to the reserve requirement ratio – the amount of cash lenders must keep in reserve – later this year to support the economy and compensate for any drainage of liquidity as it moves to prop up bond yields, such as by selling government notes. BLOOMBERG
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