China’s economic growth experienced a significant slowdown through the spring, following a strong start to the year, as reported on Monday. The decline is attributed primarily to a real estate market crash, which has made consumers more cautious with their spending.
Recent data indicates that China’s economy grew by only 0.7 percent in the second quarter compared to the previous three months, falling short of economists’ expectations. When annualized, this growth rate translates to approximately 2.8 percent, significantly lower than the 6.1 percent annualized rate reported for the first quarter.
This slowdown puts pressure on the Communist Party as its leaders convene for the Third Plenum, a crucial four-day meeting in Beijing where economic strategies for the future will be discussed. In anticipation of this conclave, the Chinese government has tightened its control over information, including the cancellation of the usual press conference by the National Bureau of Statistics and a slowdown in earnings reports from Chinese companies.
President Xi Jinping faces the challenge of maintaining confidence in his economic policies amidst this downturn. The government has attempted to counterbalance the real estate slump by boosting manufacturing investment, which rose by 9.5 percent in the first half of the year, and increasing exports. However, this strategy has led to an oversupply of goods and significant price reductions, as companies vie for consumer attention in a market where spending remains subdued.
The surge in exports has also triggered global reactions, with higher tariffs being imposed by other countries wary of the influx of Chinese products. Despite the increased export revenues, domestic consumer spending remains weak. Retail sales saw only a 2 percent growth in June compared to the previous year, supported mainly by food sales, while car sales dropped by 6.2 percent due to aggressive price cuts by automakers.
Analysts from Société Générale have described the slump in retail sales as “shocking” and indicative of an economy “limping along precariously.” Experts suggest that Beijing should enhance state pensions, government-provided health insurance, and welfare payments to stimulate consumer spending. However, the government has been hesitant to reallocate funds from military spending or state-owned enterprises.
Local governments are also grappling with financial challenges, exacerbated by the real estate crisis. They have increased tax collection and service fees to compensate for reduced revenue from land leases. This has further strained household budgets, leading many consumers to opt for cheaper products to stretch their finances.
The housing market remains troubled, with 20 million or so unfinished, presold homes yet to be delivered, causing ongoing distress in the sector. Construction companies, facing both domestic and international challenges, have turned to infrastructure projects within China as overseas demand dwindles.
A notable concern is the potential for deflation due to excess manufacturing capacity, which could lead to a broad decline in prices and further weaken economic stability. Wholesale prices have already dropped, and consumer prices are rising only marginally.
Despite these challenges, there have been some positive developments. The decision to lift visa requirements for tourists from more countries has led to a surge in international visitors, boosting hotel prices in major cities like Shanghai and Beijing. Additionally, China’s export boom continues, with the trade surplus reaching a record $99 billion last month.