China’s economy contracted more than anticipated in the latest quarter, raising the possibility that initiatives to spark growth will be revealed at a summit of senior officials in Beijing. The second-largest economy in the world grew by 4.7% between April and June 2024, as compared to 2023, according to data released by the National Bureau of Statistics.
The March quarter’s growth rate of 5.3% and the 5.1% rate that economists had projected were both lower than this result. The real estate market kept declining; in the first half of 2024, sales of brand-new commercial buildings decreased by 25% overall.
China may find it challenging to reach its annual GDP growth target of roughly 5%, as evidenced by the fact that retail sales in June decreased by 0.12% from May. There was a record trade surplus of nearly $100 billion in June alone, which helped to offset the relatively poor quarterly result, due to the export of excess manufactured goods.
China’s leaders are under more pressure to rekindle domestic growth given the prospect of increased trade barriers, especially if Donald Trump wins re-election as United States president later this year.
The data was released during a major political gathering in Beijing, where senior Chinese officials are known to have unveiled significant changes to the country’s overall economic policies.
Harry Murphy Cruise, an economist with Moody’s investor services, said, “Turning these [economic] trends around should be front and centre of this week’s third plenum.”
Nevertheless, he noted that “big policy pivots can be taken as an admission of failure and a sure-fire way to lose face” in China, so those hoping for significant economic reforms may be disappointed by the five-year event.
“Still, the five-year event may end up disappointing those seeking major economic changes as big policy pivots can be taken as an admission of failure and a sure-fire way to lose face in China. Instead, we expect a modest policy tweak that expands high-tech manufacturing and delivers a sprinkling of support to housing and households,” he added.
President Xi Jinping will preside over the meeting of the ruling Communist Party, the agenda of which, so far, has remained largely unknown.
According to state media in June 2024, the postponed four-day meeting will “primarily examine issues related to further comprehensively deepening reform and advancing Chinese modernisation.”
Xi Jinping has stated that the Communist Party is preparing “major” reforms. Analysts are hoping that these promises will lead to the much-needed economic support. Sarah Tan and Harry Murphy Cruise wrote for Moody’s Analytics recently that “the upcoming plenum can’t come soon enough.”
They recommended that Beijing act swiftly to restructure the real estate market, relax controls on internal migration, increase the number of graduate positions in high-skilled employment, and alter the tax structure to reduce the debt of local governments.
However, they went on to say that instead of implementing radical changes, the leaders would “probably not” opt for “a modest policy tweak that expands high-tech manufacturing and a sprinkling of support to housing.”
When the Communist Party’s official newspaper, The People’s Daily, issued a warning that “transformation is not about changing colour and reform is not about changing direction,” it seemed to confirm those lower expectations.
The meeting was “intended to generate and discuss big, long-term ideas and structural reforms instead of making short-term policy adjustments,” according to Ting Lu, chief China economist at Nomura.
The Communist Party’s top leadership has previously used the third plenum to announce significant changes to its economic policies.
During the conference in 1978, China’s then-leader Deng Xiaoping announced market reforms aimed at opening up the country to the rest of the world and putting it on a path toward rapid economic growth.
More recently, following the 2013 closed-door meeting, the leadership promised to make significant adjustments to economic and social policy in addition to giving the free market a “decisive” role in resource allocation.
The authorities have made it apparent that they wish to shift the economy’s focus from state-funded investment to homegrown consumption and high-tech innovation as the main drivers of growth. However, a vicious cycle that has kept consumption steadfastly low is being fuelled by economic uncertainty.
The real estate industry, which for a long time was a major driver of growth, is now deeply indebted and faces the possibility of liquidation for several of its leading companies, is one of the most pressing problems facing the economy.
Authorities have recently taken action to boost confidence and relieve pressure on developers, such as encouraging local governments to purchase unsold homes.
The property sector has shrunk year over year, for the previous 28 months, according to NAB senior economist Gerard Burg.
Real estate investment dropped seven percentage points, which was a sharper decrease than the four percentage points drop from a year earlier in May.
“Conditions in China’s residential property sector remain broadly negative – with sales falling by 14.3% year-on-year in June, while construction starts fell by 18.3%,” Gerard Burg said.
Retail sales in June 2023 were 0.8% higher than the same month the previous year, after accounting for inflation. The Omicron wave of COVID-19 and the abrupt termination of zero-COVID policies had a negative influence on that result, making it the worst since December 2022.
“This continues to point to the soft domestic demand conditions that have persisted since the pandemic,” he said.
Analysts note that much more is needed for a complete recovery, given that the nation’s economy has not recovered more than 18 months after the detrimental COVID-19 restrictions were lifted.
Meanwhile, the World Trade Organisation emphasised China’s “lack of transparency” regarding industrial subsidies, implying that other countries’ concerns about the possibility of Chinese goods overtaking the world market are fuelled by the lack of such publicly available information.
In a trade policy review of the world’s No. 1 trade body, the WTO secretariat stated that Beijing’s disclosures are insufficient in scope and detail “to have a clear picture of China’s support programmes.”
According to the report, Beijing’s subsidies and overcapacity have harmed domestic industries in the US and the EU, which have recently moved to erect new trade barriers against Chinese imports.
Canada is currently considering taking similar steps, while South American countries have imposed tariffs to limit cheap metal imports from China and Indonesia, and other Asian countries are also considering action.
As per the World Trade Organisation, China’s subsidy notifications “don’t offer details on spending amounts in industries like aluminium, electric cars, solar panels, glass, shipbuilding, semiconductors, or steel, where government backing is probably going to have worldwide consequences.”