China’s economy has experienced a setback in the second quarter, as revealed by official data, coinciding with a critical meeting of the country’s top leaders to address its lacklustre growth. The economy expanded by 4.7% in the three months to June, falling short of expectations after a robust start in the first quarter of 2024. The government’s annual growth target is around 5%.
“China’s economy hit the brakes in the June quarter,” stated Heron Lim of Moody’s Analytics. Analysts are now looking to the ongoing meeting in Beijing, known as the Third Plenum, for potential solutions.
The world’s second-largest economy faces several challenges, including a prolonged property crisis, significant local government debt, weak consumption, and high unemployment.
Historically, outcomes from the Plenum have significantly impacted China’s trajectory. In 1978, then-leader Deng Xiaoping began opening China’s markets to the world, and in 2013, President Xi Jinping hinted at easing the controversial one-child policy.
Expectations are high for this year’s Plenum, with Mr Xi presiding over a closed-door assembly of over 370 high-ranking Chinese Communist Party members. State-controlled media has been optimistic, with The Global Times editorial promising “a wide range of reform-focused policies” high on the agenda, ushering in a “new chapter.” Xinhua has referred to “comprehensive” and “unprecedented” reforms, while the People’s Daily heralded a “new era of reform and opening up,” echoing Deng’s 1978 vision.
Observers remain uncertain about the potential for bold ideas or debate under Mr Xi’s centralised leadership, with some viewing the meeting as merely ratifying pre-made decisions. Economists also doubt the meeting will offer a quick remedy.
Qian Wang, Asia Pacific chief economist at Vanguard, noted the Plenum’s focus would likely be on longer-term reforms to “unleash the long-term growth potential,” rather than immediate growth impacts. Nonetheless, analysts are keenly awaiting any announcements that might signal the Party’s economic priorities.
Separate data on Monday indicated that new home prices in June fell at the fastest rate in nine years, highlighting the ongoing crisis in China’s property sector, which has already led to the downfall of giants like Evergrande. There are fears this could spread to other parts of the economy.
“There are more than 4,000 banks in China, and over 90% are smaller, regional banks highly exposed to the housing market and local government debt,” said Shanghai-based economist Dan Wang. She anticipates Party leaders will “push for consolidation of small banks.”
Another concern is falling prices, indicative of weak demand. Retail sales in June grew by just 2%, falling below expectations and reflecting consumer caution and uncertainty about the future.
“A major concern is the loss of household, business, and investor confidence in the government’s ability to navigate the perilous economic environment,” said Eswar Prasad, former head of the International Monetary Fund’s China division.
Despite these issues, Beijing appears reluctant to implement short-term stimulus measures, such as direct cash transfers to families. Instead, the focus is likely to remain on bolstering supply chains and high-tech industries.
This aligns with Beijing’s emphasis on high-tech sectors like renewable energy, artificial intelligence, and chip-making, alongside exports to rejuvenate the economy. Last month, China reported a record trade surplus of $99bn (£76.4bn), with exports rising while imports struggled.
However, this strategy faces significant hurdles, as major trading partners, including the European Union and the United States, have imposed tariffs and other barriers on Chinese goods, ranging from electric vehicles to advanced chips.
NNEOMA UDENSI
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