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 of 4.5-5.0%. However, the overall growth rate for the first half of the year stands at 4.7%.
Mao Shengyong, deputy director of the National Bureau of Statistics, stated, "The Chinese economy operated within a reasonable range in the first half of the year," but emphasized that external uncertainties and a pronounced imbalance between supply and demand necessitate strengthening the foundation for economic growth.
Despite the global AI investment boom supporting exports and industrial production, domestic demand remains sluggish due to a prolonged downturn in the real estate market and weak consumer spending, exacerbating the supply-demand imbalance.
This trend is reflected in the physical economic indicators released on the same day. Notably, fixed asset investment (including real estate, infrastructure, and manufacturing) fell by 5.7% year-on-year in the first half, continuing a three-month decline. The drop has worsened from earlier months, exceeding market expectations of -4.9%.
Real estate development investment plummeted by 18% in the first half, a larger decline than the 16.2% drop recorded in the previous months, indicating that the real estate slump is ongoing.
Consumer spending showed a slight rebound from the previous month but remains slow to recover. Retail sales growth in June was 1%, an improvement from May's -0.6%. The May figures 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 the month.
However, market analysts suggest that strong monetary stimulus measures are unlikely, given the solid performance in the first quarter and expectations that exports and advanced manufacturing will support growth. 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 appears 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.
Given the constraints on the People's Bank of China in implementing aggressive monetary easing policies, such as stabilizing the exchange rate, there are expectations that fiscal measures will be relied upon instead.
Market sentiment is leaning towards the need for 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 and keep interest rates unchanged until the end of the year. Bloomberg suggests that the government may increase public spending and expand infrastructure investments as part of fiscal stimulus measures in the second half.
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 national 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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