China faces difficult decisions with slide in economic growth
- As GDP borders on contraction, Beijing will have to maintain confidence and fine-tune its policies without triggering a surge in inflation while facing challenging domestic and global environments
China’s economic growth teetered on the brink of contraction in the second quarter year on year, reflecting a two-month lockdown of the financial and industrial hub of Shanghai. This came on top of Covid-19 shutdowns and travel curbs that have hampered recovery in the world’s second-biggest economy.
Following an increase in gross domestic product of 4.8 per cent in the first quarter, growth in the three months to June of just 0.4 per cent dragged expansion in the first half down to 2.5 per cent. This year’s growth target of “around 5.5 per cent” would require a bounce back to 7.5 per cent in the second half.
But a return to stable growth will be the paramount goal of Beijing ahead of a landmark political meeting later this year, the 20th national party congress, which includes a leadership reshuffle. This can be expected to lead to increased pressure to fine-tune President Xi Jinping’s zero-Covid strategy and for stimulatory measures, such as looser monetary policy and fiscal stimulus, without triggering a surge of inflation.
This is in contrast to a tightening cycle to combat inflationary growth well under way among China’s trading partners.
The latest GDP number – significantly below the 1.2 per cent forecast by analysts – has lifted hopes Beijing will inject massive stimulus to boost growth. Managing the mainland economy is always a challenge, but now it is a huge one and not confined internally to living with the self-imposed burden on economic activity, especially consumer spending, of Covid rules and controls.
External factors – such as the Ukraine war, supply chain disruption, rising interest rates, inflation and China-United States tensions – compound it.
A breakdown of GDP illustrates the cost to the economy and livelihoods of Covid lockdowns and travel curbs to prevent the virus spreading unchecked and imposing an intolerable burden on the health system. Retail sales, a critical element of the abiding goal that domestic consumption shoulder a greater share of growth, fell 4.6 per cent in the second quarter after a double-digit fall in April.
Recent statements by top leaders have shown a rising sense of urgency about the need to put the economy back on a stable track. However, if there is to be a new round of credit-driven investment it should not be at the cost of exacerbating local debt problems.
Without stimulus, ‘impossible’ for China to hit annual growth target
It is an issue that tends to be forgotten or glossed over during good times, as we are reminded by the recent freezing of deposits at a few rural banks amid problematic lending involving local authorities and financial institutions.
It may not be a systemic problem, but China could do without any loss of confidence in the banking system at this time.
