China’s economic struggles extended into the third quarter, drawing renewed attention to the need for more fiscal stimulus as domestic demand falters under a prolonged housing downturn.
A significant slowdown in fixed-asset investment, which grew only 3.6% in the first seven months of the year, was a key takeaway from recent economic data. While retail sales showed a seasonal uptick, boosting China’s stock market, they remained far below pre-pandemic growth levels. Industrial production also softened slightly, although it continued to outpace consumption. The offshore yuan held onto its early losses following the data release.
This latest snapshot of China’s US$17 trillion economy reveals a loss of momentum and growing pessimism among consumers and businesses. Despite recent government efforts, including interest-rate cuts aimed at stimulating consumption and investment, the world’s second-largest economy continues to rely heavily on manufacturing to drive growth.
“The economy’s momentum slowed,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “This has posed more challenges to the goal of achieving around 5% growth this year, and policymakers would see this too.”
While markets reacted positively to the bump in retail sales, economists warn that the broader economic outlook remains challenging. President Xi Jinping’s government is targeting about 5% growth this year, but there are calls for the government to accelerate infrastructure spending to revive demand.
Fiscal support has been weak, with public expenditure contracting in the first half of the year. Although bond sales for infrastructure projects have recently picked up, the pace has been slow. The ongoing housing slump shows little sign of reversing, with home prices continuing to decline, albeit at a slower pace.
Concerns are mounting over a prolonged decline in confidence and prices, with fears that China could face a similar decades-long stagnation that Japan experienced in the 1990s. Economists are urging the government to take more assertive measures to prevent a downward spiral.
The People’s Bank of China is expected to cut interest rates again this year, but the impact is likely to be limited. The central bank’s ability to ease policy further is constrained by concerns over the yuan and the need to prevent a bond market shock.
Source Bloomberg
