Economic Slowdown in China

By Joe Cash and Kevin Yao
BEIJING (Reuters) – China’s factory output slowed for a third consecutive month in July, indicating a waning recovery in the world’s second-largest economy. However, the battered consumer sector showed signs of revitalization due to stimulus measures targeting households.

A mixed array of data released on Thursday pointed towards a sluggish start for the $19 trillion economy in the second half of the year, prompting concerns for policymakers after disappointing figures in exports, prices, and bank lending earlier this month.

Data from the National Bureau of Statistics (NBS) indicated that industrial output grew by 5.1% year-on-year, a decline from June’s 5.3% and below analysts’ anticipated 5.2% growth.

In contrast, retail sales increased 2.7% in July, up from 2.0% in June and surpassing expectations of 2.6% growth.

Analysts assert that these figures increase the demand for policymakers to implement additional consumer support rather than focusing primarily on infrastructure investment.

“Economic momentum appears to have stabilized somewhat last month, with consumer spending and services growth compensating for diminished investment and industrial production,” stated Julian Evans-Pritchard, head of China economics at Capital Economics.
“With government policy support increasing, we anticipate a modest recovery in the upcoming months.”

Chinese leaders have indicated a shift in economic strategy, prioritizing consumer-oriented stimulus over traditional infrastructure-focused measures. The state planner mentioned that around 150 billion yuan (approximately $20.97 billion) raised through special debt issuance this year would fund a consumer goods trade-in program.

“Consumer demand continued to recover, supported by policies aimed at expanding domestic demand and encouraging consumption,” remarked Liu Aihua, a spokesperson for the NBS.

Challenges for Consumer Spending

Despite the positive signs, consumer spending is heavily impacted by a significant downturn in the property market over the last three years. With around 70% of Chinese household wealth tied to real estate—a sector that previously accounted for a quarter of the economy—consumers remain cautious.

Data released on Thursday also illustrated that China’s new home prices experienced the sharpest decline in nine years in July, as supportive measures failed to revive confidence in the faltering sector.

Further evidence of weak demand is reflected in commodities usage, with China’s oil refinery output down 6.1% from the previous year and crude steel production decreasing for the second consecutive month.

In the first seven months of 2024, fixed asset investment saw a 3.6% year-on-year growth, missing predictions of a 3.9% rise and slowing from the earlier 3.9% growth from January to June.

While the initiative aimed at boosting consumer spending is largely welcomed by analysts, they caution that other policy measures will be essential for achieving economic stability. Urgent calls for growth-enhancing measures have persisted since the expected post-pandemic recovery faltered in 2022.

Despite a government growth target of around 5% for the year, analysts express concerns that China may be entering a prolonged economic stagnation akin to Japan’s experience in the 1990s, suggesting more substantial reforms may be necessary.

On Thursday, the central bank introduced liquidity into the system through a short-term bond instrument and announced plans to renew its medium-term lending facility (MLF) later this month. The central bank has pledged to enhance financial support for the economy, focusing more on boosting consumer spending.

Given the weak domestic demand and uncertain outlook, households and businesses are reluctant to take on debt, which indicates that further adjustments may be warranted.

“The data illustrates a weak start for the economy in the second half of the year, and we expect an increased likelihood of replacing MLF with a RRR cut; however, crucial to sustaining 5% growth remains the deployment of fiscal spending,” said Xing Zhaopeng, an economist with ANZ China market, referring to the central bank’s reserve requirement ratio.

($1 = 7.1543 Chinese yuan)