When janet yellen visited Beijing this month, she contributed to the local restaurant trade. The US Treasury Secretary dined with her team at an establishment known for Yunnanese cuisine, which then unveiled a “God of Wealth” menu in her honor. She also organized a lunch with female entrepreneurs and economists (including a representative of The economist). While restaurants have prospered since China dropped its covid controls late last year, the gods of wealth have been less kind to the rest of the country’s economy — as GDP figures released on July 17 revealed.
It showed that the economy grew by 6.3% in the second quarter compared to a year earlier. That looks impressive. But it went slower than expected. And the figure was flattered by a low base in 2022 as Shanghai and other cities went into lockdown last year. The economy grew by only 0.8% in the second quarter compared to the first three months of the year, only 3.2% on an annual basis (see Chart 1).
Obstacles to growth were both foreign and domestic. For example, the dollar value of Chinese exports contracted more than 12% year-on-year in June – the sharpest fall since the height of the pandemic in February 2020. “The recovery of the global economy is slow,” said Fu Linghui of the National Bureau of Statistics by way of explanation. Meanwhile, the recovery of the Chinese real estate market is lost in the kitchen garden. Apartment sales fell 27% in June compared to a year earlier. They are now well below the pace that economists say would be warranted by underlying demand given China’s urbanization and widespread desire for better housing.
China’s “nominal” growth, before inflation, was also weaker than the inflation-adjusted figure; something that has only happened four times in the past 40 quarters. It suggests that the price of Chinese goods and services is falling. In fact, it implies that they fell by 1.4% in the year to Q2, which would be the sharpest decline since the global financial crisis (see Chart 2).
Consumer prices did not rise at all in June compared to a year earlier and producer prices – calculated ex works – fell by 5.4%. Chinese statisticians attribute this weakness to changes in global commodity prices, such as falling oil prices. That is an unconvincing explanation for China’s nominal growth weakness, because GDP should only count the value added to a good in China itself, excluding the value of imported goods. Perhaps deflationary pressures are building. Or maybe the Chinese statisticians are wrong.
Some citizens believe that the economy is doing even worse than the official figures suggest. There is a “temperature difference” between the macroeconomic data and “microfeelings”, as one commentator put it. In response to this, Mr. Fu of the National Bureau of Statistics insists that macroeconomic data is more comprehensive and reliable than “microfeelings”.
The government’s own feelings towards the economy are hard to read. During the global financial crisis, after world trade fell off a cliff, Chinese authorities issued massive stimulus, propelling economic growth and spilling over to the rest of the world. They don’t seem to be in such a hurry these days. The country’s central bank has cut interest rates slightly. The tax benefits for the purchase of electric vehicles have been extended. But those who hoped that China’s State Council would release a detailed fiscal stimulus plan after its meeting on Friday, May 14, were disappointed.
This lack of urgency may reflect the government’s continued confidence in the recovery. Officials may think the economy still has enough momentum to meet their targets for the year, including before GDP growth of about 5%. The government’s reticence may also betray its doubts about additional stimulus. Policymakers do not want a wave of borrowing and spending to erode the profitability of state-owned banks or undermine financial discipline in local governments.
China’s economic reopening so far has been led by service sectors, such as restaurants, which are typically labor intensive. Chinese cities added 6.8 million jobs in the first six months of the year, more than half of the government’s target of 12 million for this year. While unemployment among urban youth rose to 21.3%, the overall unemployment rate remained stable at 5.2% in June, below the target of 5.5%.
But the labor market may be a lagging indicator of economic momentum. If growth remains weak, unemployment will eventually rise. In such a scenario, the government may be forced to do more to revive the economy. Officials can tolerate a temperature difference between data and people’s feelings. They will not be willing to tolerate a blatant gap between the economy and their objectives. ■
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