China’s economic recovery continued to lose momentum in the second quarter of 2023, leading Beijing to urgently call for more stimulus.
The world’s second-largest economy grew 6.3% in the months of April to June from a low a year ago, according to data released Monday by the National Bureau of Statistics (NBS). The figure was below expectations of a group of economists polled by Reuters.
Compared to the first quarter, gross domestic product (GDP) grew by only 0.8% from April to June. It slowed significantly from the 2.2% quarter-on-quarter growth recorded in the first quarter.
Last year, harsh Covid-19 lockdowns wreaked havoc in the world’s second-largest economy, including in the financial center of Shanghai.
The economy rebounded strongly in the first quarter of this year after the lifting of pandemic restrictions, with GDP growing by 4.5%.
However, a slew of economic data in recent months suggests that momentum has faded.
Monday’s data, which showed a marked slowdown in consumer spending and faltering business confidence, reinforced the idea that growth has indeed lost momentum.
“After a sugar injection in the early months of 2023, the pandemic hangover is plaguing China’s recovery,” said Harry Murphy Cruise, an economist at Moody’s Analytics, referring to the first burst of pent-up demand after reopening.
The waning recovery has prompted Beijing to implement some stimulus measures, but “more is urgently needed,” Cruise added.
How China is handling the slowdown is a concern for global investors and policymakers, including US Treasury Secretary Janet Yellen, who visited Beijing earlier this month.
“China is a very substantial importer from many countries around the world, so when Chinese growth slows, it affects growth in many countries and we are seeing that,” she told reporters on a trip to India.
The Chinese yuan weakened after the release of economic data. Offshore interest rates fell 0.3% from the previous day, while the onshore yuan fell almost 0.4%.
The Shanghai Composite Index fell 0.9%. The South Korean Kospi and the Australian S&P/ASX 200 were down 0.4% and 0.1% respectively. Stock markets in Hong Kong and Japan were closed.
The Chinese economy is facing a number of challenges.
Firstly, consumers are increasingly hesitant about spending.
Monday’s data showed retail sales rose 3.1% in June, significantly down from May’s 12.7%. It was the slowest growth since December when Beijing lifted most of its Covid-19 restrictions.
Second, private companies, the backbone of the economy and the largest source of employment, are hesitant to hire or make new investments.
Investments in fixed assets such as roads and infrastructure from the private sector fell by 0.2% in the first half of the year compared to the same period a year ago. This accelerated from a decline of 0.1% in the first five months of this year.
In contrast, investment in the state sector increased by 8.1% from January to June.
Youth unemployment reached another record high. The unemployment rate for the 16 to 24 age group reached 21.3% in June, breaking the previous record of 20.8% set in May.
That rate could rise further, before falling gradually after August, NBS spokesman Fu Linghui told a news conference Monday. He said this was because a large number of students and other young job seekers are expected to enter the job market during the graduation season.
Third, the real estate market is still in its worst recession ever. Investments in the real estate sector fell by 7.9% in the first six months of this year. Demand is also weak, with sales down 5.3% in terms of floor space.
Finally, a slumping global economy has added to the misery in China. According to customs figures released last week, exports fell by 12.4% in June, the fastest pace in three years. Imports fell 6.8%, worse than markets had expected.
Targeted relaxation needed
To bolster growth, the People’s Bank of China (PBOC) cut a handful of key interest rates to boost bank lending.
The government also extended tax breaks for consumers buying new energy vehicles until 2027, to boost sales and production in the world’s largest EV market.
Analysts say the measures are not enough.
“To counter continued growth headwinds, we expect more [targeted] easing measures in the coming months, with a focus on taxes, housing and consumption,” Goldman Sachs analysts said Monday.
Moody’s Cruise also expects an easing of monetary policy in the coming months.
Liu Guoqiang, deputy governor of the PBOC, told a news conference last week that the central bank will ramp up “countercyclical adjustments” to support growth.
“Countercyclical policies” refer to measures designed to counteract the effects of the economic cycle. For example, officials may issue incentives to spur expansion during a recession or tighten bank lending during a boom.
He also dismissed market concerns about falling prices and said the Chinese economy was not in deflation and will show no signs of this phenomenon in the second half of this year.
The comments came after official data was released last week showing the consumer price index was unchanged in June, the lowest pace since February 2021. Producer prices fell at the fastest pace in more than seven years.
Liu asked for patience and said the previously rolled out measures worked.
Gather tech tycoons
China’s top leaders have also signaled a turnaround in how they regulate the country’s tech giants, which was hammered by a sweeping crackdown that spanned more than two years.
On Wednesday, Premier Li Qiang met with executives from major internet companies, including Alibaba Group (BABA), Bytedance and PDD (PDD). Li hailed them as “pioneers of the era” and urged all levels of government to step up policy support for them.
The powerful National Development and Reform Commission released a statement on Wednesday praising internet companies for their role in strengthening the economy. It credited companies like Tencent (TCEHY) and Alibaba for their contributions.
Seven government agencies collectively published long-awaited rules on Friday regulating the country’s generative AI industry.
Some restrictions included in an earlier draft were relaxed, signaling the government’s taking a more permissive and supportive approach to the nascent technology as it competes with rivals in countries like the United States.
Chinese tech stocks rose last week on the good news. The Hang Seng Tech Index rose more than 8%, its best weekly performance since December 2022.
– CNN’s Manveena Suri contributed reporting.
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