China’s economy is at risk. Ex-central bank chief warns of deflation spiral amid weak consumer demand and faltering property market. Calls for urgent action as youth unemployment rises and confidence in Xi’s leadership wanes. Low-cost export growth cannot mask the deepening woes created by the property sector inspired crisis.
The Chinese economy requires urgent action to tackle deflation and weakening consumer demand within its borders. This year, the country has certainly boosted exports. However, an imploding property market and a lack of confidence make consumers shy away from spending. At the same time, with rising youth unemployment and a lack of decisive action from President Xi Jinping’s orthodox administration, there are heightened concerns.
China faces an urgent need to tackle deflationary pressures, according to former central bank governor Yi Gang. He spoke last Friday at the Bund Summit, an influential economic conference in Shanghai. Yi expressed concern about the nation’s economic trajectory, highlighting the need for policymakers to take swift action. This acknowledgement from such a high-ranking former official underscores the seriousness of the deflation risk in the world’s second-largest economy.
Yi, who served as governor of the People’s Bank of China (PBoC) until stepping down last year, emphasised the importance of loosening monetary policy to support the real economy. He argued that policymakers must focus on bringing the GDP deflator — a broad measure of price levels in the economy — back into positive territory to dispel deflation.
China’s economy has been struggling with weak domestic demand since the pandemic, with the property market collapse further eroding household confidence.
This lack of demand, combined with overproduction in some sectors, has spurred fierce competition, driving down prices and corporate profits.
Additionally, government crackdowns on various industries have further dampened investor sentiment, exacerbating economic woes.
Deflationary pressures reflect China’s slowing economy
Deflationary pressures are evident in China’s nominal GDP, which reportedly grew by only 4.0% year-on-year in the second quarter, compared to 4.7% growth in real GDP.
This slowing growth highlights the challenges facing the Chinese economy, which is struggling with weak consumer demand and an ongoing malaise in the property sector.
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Recent data has only reinforced concerns about the economy’s health. Official figures show that China’s GDP grew by 4.7% year-on-year in the second quarter, missing forecasts and marking a slowdown compared to the previous quarter. This is a stark contrast to the 5.3% growth seen in the first quarter, reflecting the economy’s ongoing difficulties.
Weak consumer demand and a prolonged property downturn have prompted increased intervention.
Policymakers, in recent months, have sought to restore confidence. The Chinese Communist Party’s Central Committee in July, held its third plenum. This was a four-day meeting to set the direction for future economic policy. It was the first such meeting since 2018. Observers closely watched for signs of further stimulus, particularly in the struggling housing sector.
They were disappointed.
Mixed economic data shows challenges ahead
China’s economic growth has undeniably slowed. However, some sectors have shown resilience. Industrial production beat expectations, growing by 5.3% in June, according to the National Bureau of Statistics.
At the same time, retail sales rose by just 2% in the same month, significantly missing expectations. Fixed-asset investment also increased by 3.9% in the first half of 2024, but this was not enough to offset the broader economic slowdown.
Junyu Tan, an economist for North Asia at credit insurer Coface, noted that recent data still points to stronger growth on the production side than on the demand side.
He emphasised that softening domestic demand has more than offset any boost from export recovery, further highlighting the challenges facing the Chinese economy.
Despite these challenges, China’s economy has benefited from stronger exports. For instance, they rose by 8.6% in dollar terms in June compared to the previous year. However, imports declined by 2.3%, further signalling weak domestic demand. Consumer prices also rose by just 0.2% year-on-year in June, reflecting low or negative growth over the past year.
Deepening property market woes and global tensions compound the Communist country’s economic struggles
The property market remains one of China’s biggest economic challenges. New home prices fell by 4.5% year-on-year in June, marking the fastest pace of decline in nine years.
Additionally, new construction starts and property investment were down 23.7% and 10.1%, respectively, in the first half of 2024.
These declines have put further pressure on the economy, with Beijing setting a full-year growth target of around 5%.
International trade tensions are also weighing on China’s economy.
The European Union recently followed the United States in targeting Chinese electric vehicles (EVs), announcing higher tariffs on the controversial Chinese vehicles. Furthermore, demand for EVs has begun to fall in the European Union and Thailand, while demand for hybrid vehicles is surging. This shift is adding to the economic headwinds facing China.
Several major banks have lowered their full-year forecasts for China’s economic growth in response to the latest data. Goldman Sachs cut its 2024 GDP growth estimate from 5% to 4.9%. Later, JPMorgan revised its forecast from 5.2% to 4.7%. Oxford Economics also lowered its full-year target to 4.8%, a slight undershoot of the official growth target.
Calls for further stimulus and economic reforms as Chinese economy shows ominous signs
As China struggles with these economic challenges, concern is rising as youth unemployment reaches 21.7%. The malaise is spreading to the extent that even managed economic data can no longer hide the truth. The latest situation has sparked calls for further stimulus and broader reforms.
Eswar Prasad, a professor of economics at Cornell University, notes that the latest data release adds force to demands for stimulus measures, including fiscal support for households and broader reforms to create a more favourable business environment for private enterprises.
Prasad warns that China’s reliance on exports to drive growth could lead to rising trade tensions with its major trading partners, further complicating the economic outlook. Ongoing struggles in the domestic market underscore the need for decisive action from policymakers.
The final policy announcement after the Chinese Communist Party’s Central Committee meeting in July was a disappointment.
Analysts were searching for signs of how Beijing plans to navigate these challenges, but what they got were platitudes and a bland statement. As confidence falters further, the pressure is on China’s leadership.
Without bold steps to stabilise growth and restore confidence in the world’s second-largest economy, the trend of decoupling from China will strengthen.
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