China's economy grew by 4.3% in the second quarter, marking its lowest growth rate in over three and a half years since the COVID-19 pandemic. While exports and manufacturing benefited from a surge in artificial intelligence (AI) investments, domestic consumption and the real estate sector continued to struggle, hindering overall economic growth.
According to the National Bureau of Statistics, China's gross domestic product (GDP) increased by 4.3% compared to the same period last year. This figure falls short of market expectations from Reuters (4.5%), Bloomberg (4.5%), and the Nihon Keizai Shimbun (4.6%). It is also 0.7 percentage points lower than the first quarter's growth of 5.0% and does not meet the government's annual growth target range of 4.5% to 5.0% set at the beginning of the year.
Mao Shengyong, deputy director of the National Bureau of Statistics, stated, "The Chinese economy has operated within a reasonable range in the first half of the year," but emphasized that there are still many external uncertainties and a pronounced imbalance between supply and demand domestically, necessitating a stronger foundation for economic growth.
Indeed, the Chinese economy has seen robust exports and industrial production driven by global AI investment trends. However, the prolonged slump in the real estate market and weak consumer spending have exacerbated the supply-demand imbalance.
This was evident in the economic indicators released for June. Notably, fixed asset investment (including real estate, infrastructure, and manufacturing) fell by 5.7% year-on-year, continuing a three-month decline. The drop was more severe than the market forecast of -4.9%, worsening from earlier months (-1.6% in January-April and -4.1% in January-May).
Specifically, real estate development investment plummeted by 18% in the first half of the year, a larger decline than the 16.2% drop recorded in January-May, indicating that the real estate downturn is still ongoing.
Consumer spending showed a slight rebound from the previous month but remains sluggish. The retail sales growth rate in June was 1%, an improvement from -0.6% in May, which marked the first decline in nearly three and a half years since the pandemic.
In contrast, industrial production, which reflects corporate activity, increased by 5.3% year-on-year in June, surpassing the previous month's growth rate of 4.5%.
As China's economy experiences a more significant slowdown than anticipated, there is a growing likelihood that the leadership will focus on economic policy directions during the upcoming Central Politburo meeting at the end of this month.
However, market expectations suggest that aggressive monetary stimulus measures are unlikely, given the positive economic performance in the first quarter and the anticipated support from exports and advanced manufacturing. A Reuters survey indicated that China's economic growth rate is expected to rise slightly to 4.6% in the third quarter before slowing to 4.5% in the fourth quarter, resulting in an annual growth rate of 4.6%.
Zhou Hao, chief economist at Guotai Junan International Holdings, told Bloomberg, "Considering various indicators, it shows that the Chinese economy is not in a broad recession but is maintaining growth at a slower pace," advising caution regarding expectations for aggressive economic stimulus packages.
Particularly, the People's Bank of China faces constraints in implementing aggressive monetary easing policies due to the need for exchange rate stability, leading to expectations of reliance on fiscal stimulus measures.
Market sentiment is also leaning towards the necessity of fiscal expansion over monetary policy. Reuters predicts that the People's Bank of China may lower the reserve requirement ratio for financial institutions by 20 basis points in the fourth quarter, while keeping the benchmark interest rate unchanged until the end of the year. Bloomberg suggests that the government may utilize fiscal stimulus measures, such as increasing public spending and expanding infrastructure investment, in the second half of the year.
Li Daokui, a professor at Tsinghua University, advised during a macroeconomic seminar at Renmin University on July 11 that the Chinese government should increase the issuance of new government bonds to actively invest in areas affecting people's livelihoods, such as local government debt resolution, purchasing unsold housing, providing affordable housing, and expanding welfare for farmers to stimulate the economy.
* This article has been translated by AI.
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