Although China’s National Bureau of Statistics speaks of signs of a “good dynamic recovery”, new data on the Asian giant’s economy do not leave much room for optimism. The Chinese economy grew by only 0.8% between the first and second quarters of this year.
Growth did reach 6.3% year-on-year in the quarter to the end of June. But the bar was low, compared to the very weak second quarter of 2022, when Shanghai went into a “lockdown” due to COVID-19. Beijing, however, prefers to see the “glass half full”, highlighting the fact that this year’s second quarter outpaced the first.
The real estate market is falling. Global demand for Chinese products – which in the midst of the pandemic had soared – is now recording a significant decline. Exports fell 12.4% in June on a year-on-year basis, the biggest drop in three years.
Retail sales rose 3% compared with May, less than forecasts. The scene is completed by the new data on youth unemployment. In urban areas, 16 to 24-year-olds reached a new high last month, at 21.3%.
That is four times the official national unemployment rate, which remains stagnant at 5.2%, a 16-month low. The gap was widened in June by 11.58 million university graduates, who “threw themselves” into the already “tight” labor market – more than ever before.
There are few jobs available that are not suitable for their studies. The phenomenon is mainly attributed to close state control, especially in the technological sector. Although now a major concern of the Chinese leadership, youth unemployment is expected to rise further in August. The expectation is that then it will reach its zenith.
“Tight Wallets”
The pressure to take measures to stimulate the second largest economy on the planet is fatally intensifying. Already last month the Central Bank cut interest rates for the first time in almost a year in an attempt to boost spending.
On Monday, it announced an extension of measures to revive the property market until the end of 2024. But as things stand, the words of China’s new Premier Li Chiang last March that Beijing will have to redouble efforts to meet its economic growth target of 5% this year seem as relevant as ever.
Reflecting a serious lack of confidence, more and more Chinese are now changing their spending habits. They buy fewer and cheaper products. They avoid what are considered luxuries and wastes.
Car sales have fallen, as have new home loan applications. The data shows a shift to saving amid heightened concerns about job and income security.
The decline in consumer confidence is even reflected in social media. Not coincidentally, more and more homegrown influencers are turning to advice on cutting expenses.
This massive reluctance to spend is now being recorded in official statistics, with analysts warning that China is on the brink of deflation. The consumer price index was unchanged year-on-year in June, at the lowest level since February 2021.
Posting its biggest drop since December 2015, the Producer Price Index (PPI) – which shows the average change in the selling prices of domestic producers of goods and services in the industrial, commodity and manufacturing sectors – fell in June for the ninth consecutive month.
Negative spiral ahead?
Since last December, after Beijing ended its draconian “zero cases” policy in response to COVID-19, the expectation was that Chinese households would spend their savings during the pandemic. But instead of this internal boost to the Chinese economy, wallets seem to remain closed to this day.
The Chinese primarily save, rather than spend. According to Central Bank data, household deposits continued to grow in the first half of the year, reaching a total of $2.5 trillion.
In the long run, this could mean that a lack of demand from abroad could, in theory, be offset by a potential increase in domestic consumption. In the short term, however, this is not going to happen.
In a self-perpetuating cycle—completely different from the one the West is now experiencing—concerns in China are intensifying about stagflation. But concerns about the possibility of stagnant inflation are not limited to Beijing.
Just last May the IMF predicted that “in a year of challenges for the global economy”, amid rising interest rates and “persistently high” inflation in the West, the reopening of China’s market would contribute 34.9% to global economic growth in 2023. Two months on, China’s slow recovery is turning into danger. In the long term, new challenges await.
The trade war is…well, it’s holding up
“The Chinese economy, which for decades has been the main driver of regional and global growth, is expected to slow significantly due to adverse demographics and slowing productivity. Priority should be given to structural reforms to stimulate long-term growth. Among other things through innovation and digitization, while accelerating the transition to green energy,” the IMF said.
In the background is the escalating geopolitical rivalry and the intensifying trade war with the US.
Now Washington is considering extending restrictions on exports of advanced semiconductor technology to China and is stepping up pressure on the EU in this direction. China, for its part, announced controls from August 1 on exports of certain metals, which are widely used in the semiconductor industry and which it describes as strategic for national security.
As for the home front?
Estimates differ on Beijing’s next moves. So far, the measures that have been announced are selective.
Last week, the Chinese premier called on executives from domestic tech giants to help boost the economy. Nevertheless, the official government target for growth this year at 5% of GDP already seems far away…
