More stimulus is desperately needed as China's economic recovery remains stagnant
In the second quarter
of 2023, China’s economic recovery slowed further, prompting urgent requests
for further stimulus from Beijing.
According to figures
provided by the National Bureau of Statistics (NBS) on Monday, the world’s
second largest economy grew by 6.3% in the months of April-June, compared to a
weak base a year before. Economists polled by Reuters had lower expectations, therefore
the number was disappointing.
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Gross domestic product
(GDP) rose by only 0.8% from April through June, compared to the first quarter.
It slowed considerably from the first quarter’s quarterly growth rate of 2.2%.
Last year, severe
Covid-19 lockdowns caused disorder in the world’s second largest economy,
including the financial centre of Shanghai.
Following the removal
of pandemic restrictions, the economy rebounded significantly in the first
quarter of this year, with GDP increasing by 4.5%.
A broad range of
economic data from the past few months, however, indicates that momentum is
weakening.
The data released on
Monday, which indicated a significant slowdown in consumer spending and a
decline in business confidence, reinforced the notion that growth has indeed
lost momentum.
Beijing has introduced
some stimulus measures in response to the weakening economy, but “more is
desperately needed,” Cruise added.
Investors worldwide and
policy makers, which includes US Treasury Secretary Janet Yellen, who went to
Beijing last month, are concerned about China’s response to its decline.
“China is an
important buyer from several nations around the world, thus when Chinese growth
slows, it affects the growth in many countries,” she informed reporters
during a visit to India. The Chinese yuan
depreciated following the publication of economic data. The offshore rate
decreased by 0.3% compared to the previous day, while the onshore yuan fell by
nearly 0.4%.
The Shanghai Composite
Index went down by 0.9%. The Kospi in South Korea and the S&P/ASX 200 in
Australia fell 0.4% and 0.1%, respectively. The stock exchanges in Hong Kong
and Japan were closed.
Challenges
faced by the Economy
The Chinese economy
confronts numerous difficulties.
First,
consumers are becoming increasingly hesitant to spend.
According to data
released on Monday, retail sales increased 3.1% in June, substantially less
than May’s 12.7% increase. It marked the weakest growth since Beijing lifted
the majority of its Covid-19 restrictions in December.
Second,
private
businesses, which make up the bulk of the economy’s employers and workforce,
are unwilling to hire new employees and make new investments.
Private sector
investment in fixed assets such as roads and infrastructure decreased by 0.2%
in the first half of the year, compared to the same period the previous year.
This increased from a 0.1% decline during the first five months of the year.
In contrast,
state-sector investment increased 8.1% from January to June.
Youth unemployment
reached a new all-time high. In June, the unemployment rate for young adults
aged 16 to 24 reached 21.3%, surpassing the previous record of 20.8% set in
May.
NBS spokesman Fu
Linghui stated at a press conference on Monday that this rate could rise
further before declining progressively after August. During the graduation season,
a large number of college students and other youthful job seekers are
anticipated to enter the labour market, he explained.
Thirdly,
the housing market continues to be plagued by the worst downturn on record.
During the first half of this year, investment in the real estate industry
dropped 7.9%. In terms of floor space, sales are down 5.3% as a result of dull demand. A weakening global
economy has added to China’s troubles. According to data released by customs
last week, exports fell by 12.4% in June, the steepest decline in three years.
Imports fell 6.8%, which was worse than expected by the market.
Measures
adopted
The People’s Bank of
China (PBOC) has reduced a number of key interest rates to stimulate bank
lending in order to stimulate economic growth.
In order to encourage
sales and production in the world’s largest EV market, the government extended
tax benefits for consumers purchasing new energy vehicles through 2027.
Analysts claim that the
measures are insufficient. The People’s Bank of
China (PBOC) has reduced a number of key interest rates to stimulate bank
lending in order to stimulate economic growth.
In an attempt to
promote sales and production in the world’s largest EV market, the government
extended tax benefits for consumers purchasing new energy vehicles through
2027.
Analysts claim that the
measures are insufficient. Monday, Goldman Sachs
analysts stated, “To combat continuing growth headwinds, we anticipate
more [targeted] relieving measures in the coming months, with a particular focus
on fiscal, housing, and consumption.”
Cruise from Moody’s
also anticipates an easing of monetary policy in the future months. Liu Guoqiang, vice
governor of the People’s Bank of China, stated last week at a press conference
that the central bank will increase “countercyclical adjustments” to
support development.
The term
“countercyclical policies” refers to measures designed to counteract
the effects of the business cycle. During a recession, for instance, officials
may add stimuli to stimulate economic growth, whereas during a boom they may
restrict bank lending.
He also dismissed
market concerns regarding falling prices, stating that the Chinese economy was
not experiencing deflation and would not exhibit any indications of the
phenomenon in the second half of this year.
The comments followed
the publication of official data indicating that the consumer price index
remained unchanged in June, the slowest rate since February 2021. The rate of
decline in producer prices was the quickest in more than seven years. Liu appealed for
patience, indicating that previous measures were effective.
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