A man walks past an emoji at a shopping mall in Beijing on July 20. While the chances are good that the Chinese economy can hit the expected 5 per cent annual growth target, the government may have to step in more forcefully to nudge growth back on track. Photo: AFP
Opinion
Macroscope
by David Chao
Macroscope
by David Chao
China economy: no massive stimulus, but Beijing could still spring some surprises
With recent economic data overwhelmingly gloomy, policymakers can be expected to try and nudge the economy back on track, through both monetary and fiscal tools
Any support measures are also likely to fall in line with Chinese leaders’ push for high-quality development
After staging an impressive first quarter, China’s economy has lost momentum. Headline GDP growth in the second quarter slowed to 0.8 per cent from the previous quarter, down from the first quarter’s 2.2 per cent sequential growth, due to lacklustre consumer demand and a weaker global macro backdrop.
Recent soft data, such as the manufacturing and services purchasing managers’ indices, and hard data, such as new homes sales and trade numbers, have all fallen short of expectations. Retail sales came in roughly flat on a seasonally adjusted month-on-month basis, after taking into account base effects, and property market investments continue to languish.
While official industrial production figures handily beat estimates, this was probably helped by infrastructure investments during the month. And the slowing growth in goods demand and export sales among industrial firms suggest growth output is seeing some deterioration overall. Meanwhile, the softness in China’s monthly export and import data further confirms that the reopening boom has slowed.
Markets should be careful not to get too carried away with expectations for dramatic or radical stimulus measures. It’s fair to see the June data as showing stabilisation across most sectors – and this view is probably behind the People’s Bank of China’s decision to leave interest rates unchanged on July 17.
Nonetheless, the highly anticipated July meeting of China’s Politburo is likely to trigger some surprises and more stimulus measures. This quarterly meeting, expected to take place this week, is usually where policymakers evaluate the growth outlook and set the policy tone for what’s to come.
While the chances are good that the economy can hit the expected 5 per cent annual growth target due to a favourable base effect, the government may have to step in more forcefully to nudge growth back on track. All eyes are on what stimulus measures can be rolled out in the coming quarter to ensure that the recent weakness in the industrial sector does not impair recovery in the service sector.
Cars waiting to be loaded for export are seen at Yantai Port in east China’s Shandong province, on July 5. The softness in China’s monthly export and import data further confirms that the reopening boom has slowed. Photo: Xinhua
When faced with flagging growth in the past, Beijing policymakers have relied on stimulating the economy principally through infrastructure investment and property market support. The story is different this time, though, with local governments saddled with debt and a property market that remains in the doldrums.
This, coupled with President Xi Jinping’s call for “common prosperity”, which emphasises an agenda that focuses on income redistribution and greater reliance on domestic capital and resources, has influenced policies and impacted the government’s response to the slowdown.
Both Xi and Premier Li Qiang have emphasised the need for a “high quality” development model underpinned by domestic reliance. Chinese leaders are aiming for a “comprehensive, balanced and long-term” recovery, Li said at a symposium in Beijing earlier this month.
It’s fair to conclude that, instead of relying on short-term investments or foreign resources, Chinese leaders are aiming for growth from home-grown technologies and domestic household spending.
On paper, this growth framework makes sense. The global macroeconomy has deteriorated while Chinese households are sitting on excess savings amassed during the pandemic. The problem is that the initial burst in revenge spending after China’s abrupt reopening has been somewhat fleeting. Instead, household sentiment and confidence remain cautious.
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Much Chinese household wealth is tied to the property market, which remains weak, and youth unemployment has touched record highs, sapping consumer confidence. Instead of a sharp V-shaped recovery led by consumption, it could be more U-shaped, and ultimately take more time to play out.
While the government has consciously veered away from stimulating the economy via the two major channels it has previously relied on, the recent sharp deceleration in growth could force the hand of officials back to the historical playbook.
At its meeting on June 16, the State Council pledged to introduce policy measures to sustain recovery, raising hopes of further stimulus. It’s a positive sign that policymakers are aware of the recent economic pressures and stand ready to boost the economy in the second half of the year.
In terms of monetary policies, the PBOC has unveiled a 10-basis-point policy rate cut – the first since last August, provided more liquidity to support small and medium-sized enterprises, and introduced measures to ease liquidity for developers. The central bank is now in a rate-cutting cycle, and another policy rate cut, along with a reduction in the reserve requirement ratio and mortgage rate, may be on the horizon.
Monetary policymakers can use a host of other tools to buffer the economy against a further slowdown, such as the PBOC’s pledged supplementary lending programme that injects funds into policy banks, allowing them to lend more.
The People’s Bank of China building in Beijing on June 26. The central bank is squarely now in a rate-cutting cycle. Photo: Bloomberg
Looking at possible measures, it’s clear that fiscal stimulus will have the greatest economic impact. Policymakers are expected to focus on additional support for housing and private consumption. The government is also likely to push forward with another round of infrastructure stimulus, most likely paid for by raising the quota for local government special bonds.
We should expect to see stimulus measures that align with China’s broader industrial policy towards higher-quality growth, with sectors such as electric vehicles, energy transition and hi-tech manufacturing taking the lead. The Politburo could funnel stimulus capital to these favoured sectors, perhaps by reintroducing the special treasury bonds it last issued in 2020 to support the pandemic-battered economy.
Although there isn’t a single silver bullet, such monetary and fiscal stimulus measures, when taken together, could raise market spirits and drive growth back on track in the second half of the year.
David Chao is a global market strategist (Asia-Pacific) at Invesco
