In troubled times, the regular data snapshots from the world’s second largest economy can attract a frenzied level of attention that obscures more than it enlightens. China’s latest economic figures may seem weak, with consumer and business confidence faltering, but the truth is that stronger policy support also appears to be forthcoming, which should ultimately help stabilise the economy.
Sputtering engines
Let’s start with the negatives, though. China’s main economic engines do seem to have been misfiring recently. The strong post-pandemic bounceback has subsided and momentum is slowing. Fixed asset investment has also disappointed, which is a concern for an economy where investment accounts for more than 40% of GDP. Investment growth eased back to 3.8% in the first six months of 2023 from 4% in the first five months, following a small contraction in private investment.
Infrastructure spending remains robust because of government efforts but investment in real estate activity is declining. The travails of the property markets matter because the sector accounts for close to 30% of the economy. External demand has also been of little help, with exports contracting by 12.4% year on year in June compared with 7.5% in May.
Moreover, July’s purchasing manager surveys show manufacturing activity continuing to decline and new orders still in the doldrums. The recovery in the services sector, the one area which had remained relatively vibrant up to now, is also coming off the boil.
Ordinary Chinese are increasing their savings and repaying debt rather than spending
Belief
The principal challenge is low confidence. Many Chinese have invested substantial amounts of their savings in housing and have been understandably rattled by losses in the property sector. And with the unemployment rate among the 16–24 age group rising to a record high of 21.3% in June from 20.8% in May, demand from this high-spending cohort has also slackened. The banking data shows that ordinary Chinese are increasing their savings and repaying debt rather than spending.
The private sector also appears hesitant about investing in new capacity, partly because of uncertainty over regulations and concerns that weak demographic trends will translate into slow demand growth over time.
Measured
In the past few weeks, China’s leaders have signalled they are increasingly inclined to step up support for the economy. However, they are also clear in their minds that they want to avoid the excessive stimulus of previous years that created imbalances in the economy such as high debt and overinvestment. They are therefore looking to a graduated set of measures rather than the previous’ approach of massive monetary and fiscal packages.
In line with this gradualist strategy, they have been announcing calibrated measures in many areas. Consumers have been told there will be incentives for them to spend – but only in selected areas that are in line with the government’s strategic development goals, such as new energy vehicles.
Enough policy support looks forthcoming to meet this year’s 5% growth target
There will be more infrastructure spending. But the local governments who usually lead the charge in this area have been warned to vet projects carefully for viability and to avoid opportunities for corruption.
Aware of the need to boost private sector confidence, senior leaders have also been reaching out to corporate leaders with assurances that their interests will be protected. Acknowledging the need to move more expeditiously in liberalising the restrictions on residential rights of migrant workers, the authorities have recently announced a significant easing of such restrictions, beginning with smaller cities.
The path ahead for China’s economy may not be an easy one but enough policy support looks to be forthcoming to ensure the government’s target of around 5% growth this year will be met.
