China’s Economic Underperformance Increases Likelihood of Further Stimulus Measures

China’s economic recovery following the lifting of its stringent zero-COVID policy has faltered, raising concerns both domestically and internationally. The second quarter of 2023 saw a 6.3% year-on-year growth rate, significantly below analyst projections and highlighting the challenges the nation faces in reigniting its economic engine. This underwhelming performance is attributed to a confluence of factors, including a slump in the crucial property sector, flagging consumer demand, and a concerning surge in youth unemployment. These issues paint a picture of an economy struggling to regain its pre-pandemic momentum, prompting calls for more robust government intervention.

The property market, a cornerstone of China’s economic growth for decades, continues to grapple with the effects of government measures to curb excessive borrowing and speculation. Investment in property development plummeted by 7.9% in the first half of 2023 compared to the previous year, signaling a deepening crisis in the sector. This decline has ripple effects throughout the economy, impacting related industries like construction and manufacturing, and dampening consumer confidence. The struggles in the property sector are further compounded by a record high youth unemployment rate of 21.3%, a figure that underscores the broader challenges facing the Chinese economy. This high rate of unemployment not only creates social anxieties but also curtails consumer spending, further hindering economic recovery.

Although the 6.3% growth rate appears robust compared to the 0.4% growth during the same period in 2022, the context is crucial. The 2022 figures were significantly depressed by widespread lockdowns and stringent COVID-19 restrictions. The current growth rate, therefore, represents a recovery from a severely depressed baseline rather than a genuine resurgence of economic activity. Furthermore, the year-on-year comparison masks the quarter-on-quarter growth of only 0.8%, indicating a slowdown in momentum from the previous quarter’s 2.2% growth. This deceleration suggests that the initial boost from the reopening of the economy has waned, and sustained growth requires more substantial and targeted policies.

The government has acknowledged the economic headwinds and maintains its commitment to achieving the official growth target of around 5% for the year. However, achieving this target hinges on implementing effective measures to stimulate demand and address the underlying structural issues. While officials have pledged to adjust policies to stabilize growth, the specifics of these adjustments remain to be seen. Analysts, however, are less optimistic than the government, citing weakening global demand for Chinese exports and the persistent challenges in the domestic market. The effectiveness of the government’s response will be critical in determining whether China can regain its economic footing and achieve its growth targets.

Several policy options are being considered, including increased government spending, interest rate cuts, and measures to ease credit conditions. Government spending is expected to be directed towards key sectors like real estate and construction, aiming to boost investment and create jobs. However, experts warn that government spending alone will not be sufficient to address the deep-seated issues plaguing the economy. Further measures, such as monetary easing and structural reforms, are likely needed to stimulate private investment and consumer spending, driving a more sustainable recovery. The challenge for policymakers is to calibrate these measures effectively to avoid exacerbating existing risks, such as rising debt levels.

The weakening global economic outlook poses a significant challenge for China’s export-oriented economy. June saw a 12.4% year-on-year decline in exports, reflecting the dampening effect of higher interest rates in major economies like the US and Europe. This decline in external demand further underscores the need for China to focus on stimulating domestic consumption and investment to bolster economic growth. While retail sales showed a modest 3.1% increase in June, this figure is not robust enough to offset the weakness in exports and investment. The government’s policy response must, therefore, address both the short-term cyclical challenges and the longer-term structural issues to ensure a sustained and balanced recovery. The coming months will be crucial in assessing the efficacy of the government’s policy interventions and determining the trajectory of China’s economic recovery.