BEIJING – China’s lower-than-expected growth in the second quarter comes as the world’s second largest economy is hit by sluggish consumption, a real estate sector in crisis and worries over deflation.
Here is a look at the main storm clouds over China’s economy:
Sluggish consumption
For almost three years Beijing’s strict zero-Covid policies meant repeated lockdowns, the fear of being arbitrarily quarantined and other draconian health measures that dragged down consumer spending.
When the restrictions were lifted at the end of 2022, millions flocked to restaurants, shopping malls and on long-awaited holidays.
But that optimism hasn’t lasted, with the recovery running out of steam and the labour market under pressure — more than one in five young people is unemployed.
“Companies are reluctant to hire due to soft consumer demand, and consumers are reluctant to spend” because of the economic situation, economist Larry Hu, of the investment bank Macquarie, told AFP.
“Such a self-fulfilled downward spiral bears some resemblance to Japan’s ‘lost decades’,” he warned, referring to years of stagnation in what is now the world’s third largest economy.
Real estate in crisis
Bricks and mortar are a pillar of the economy in a country where property has long been seen as a safe bet for middle class Chinese seeking to grow their wealth.
That demand sent property prices soaring, while developers expanded at breakneck speed thanks to generous bank loans.
But as those companies’ debts reached unsustainable heights, authorities pushed the brakes in 2020.
Since then, developers’ access to credit has been considerably reduced, with the most vulnerable struggling to complete their projects, fuelling a crisis of confidence with potential buyers that is depressing prices.
China’s central bank last week decided to extend its support for developers, notably through loan repayment extensions, until the end of 2024. That came after officials cut interest rates last month.
But these measures are “insufficient” to “save” the sector, according to Nomura bank analyst Ting Lu.
Deflation looms
For months prices in China have been virtually flat, but while on paper this may seem like a good thing for purchasing power, a drop into deflation would pose a long-term threat.
Instead of spending, consumers postpone purchases in the hope of lower prices.
And in the absence of demand, companies cut back on production, freeze hiring or lay off staff and agree to further price cuts to clear their inventories, which weighs on profitability as their costs remain the same.
Trade under threat
China, long described as “the workshop of the world”, remains highly dependent on exports — making it vulnerable to vicissitudes in the global economy.
The threat of recession in the United States and Europe, combined with galloping inflation, is weakening international demand for Chinese products.
In June, exports fell for the second month in a row.
Geopolitical tensions
Tensions between China and the United States have also hurt the economic outlook.
Washington officials are working to “de-risk” their economy from China — including tightening restrictions on semiconductor exports in the name of national security and pressuring allies to do the same.
Customs spokesman Lyu Daliang last week blamed outside forces having a “direct impact” on Chinese trade.
“The risks linked to unilateralism, protectionism, and geopolitics are on the rise,” he said in a statement accompanying disappointing export figures.
Indebted local authorities
Also dragging on the economy is the dire finances of some local authorities after three years of astronomical spending to combat Covid and a real estate crisis that has deprived them of a major source of property income.
These difficulties, exacerbated by the economic context, will “become more visible in the second half of the year as China’s economic and financial problems increasingly bubble to the surface”, according to analysts at SinoInsider, a US-based firm. – AFP / pic Bloomberg
RELATED ARTICLES
China PCR Purchases Spiked in Months Before First Known Covid Cases, Firm Says