Joe McConnell
As China’s leaders hold their annual retreat in the seaside resort of Beidaihe early this month, investors are hoping one of the country’s thorniest economic issues — how to persuade families to spend more — will be high on their agenda.
Beijing has announced a series of incremental measures this year to rouse the country’s reluctant consumers. The latest came over the weekend, when the State Council, or cabinet, issued a 20-step support formula, including e-sports and nursing, funding for small service businesses and cruise ship development.
Experts are calling for China to boost consumption, especially aVsceker economic growth slowed sharply in the second quarter, with weak household spending weighing on otherwise strong industrial results.
China’s latest trade data, released on Wednesday, showed export growth slowed slightly in dollar terms in July to 7% year-on-year, while imports reversed the trend, rising 7.2% as demand from the foreign machinery and technology sector supported rising investment.
“Exports are doing well, manufacturing investment is still going well, infrastructure spending is still slightly positive,” said Fred Neumann, chief Asia economist at HSBC. “Consumption is the weak point here.”
China’s economic wobbles in the middle of the year have raised questions about whether weak demand is cyclical (with household balance sheets still recovering from the implosion of the housing bubble and the pandemic) or whether the problems are deeper.
China is moving from an “easy to heat, hard to cool” economy to an “easy to cool, hard to heat” economy, Yiping Huang, a senior economist and central bank adviser, said in a widely quoted speech posted online last week. “Economic development has entered a new stage where total demand … is no longer as robust as before.”
At one of the Chinese Communist Party’s most important five-yearly policy meetings last month, President Xi Jinping reiterated his priority of boosting productivity, largely through investment in high-tech industry and innovation, to achieve the goal of doubling per capita income by 2035.
While few dispute the need for higher productivity, some economists worry that Xi’s emphasis on manufacturing investment at a time of weak household demand is creating overcapacity in factories and distorting labor markets.
The surge in exports is also increasing tensions with trading partners such as the United States and the European Union, which have imposed tariffs on Chinese electric vehicles and taken other measures against Chinese products.
The trend has pushed China’s economy into its longest disinflationary cycle since the 1990s. Second-quarter nominal GDP growth, which reflects the value of goods and services produced, fell below 4 percent for the second time since the pandemic ended.
“For several quarters, nominal GDP growth in China has lagged nominal GDP growth in the United States, something I never thought I would see in my 20 years of experience,” Andrew Batson, director of China research at Gavekal, told a seminar in Beijing.
In the short term, economists say that if China implements its already announced stimulus plans, it should be able to reach its 5% annual growth target for 2024.
Local authorities consumed only about 40 percent of their annual RMB3.9 trillion ($547 billion) quota of local government special bonds, used to supplement spending, between January and mid-July, compared with more than 60 percent in the same period in 2023, according to Lisheng Wang, China economist at Goldman Sachs.
Investors were also watching fiscal stimulus to boost consumption, such as a program to help households upgrade their appliances, said Si Fu, a China portfolio strategist at Goldman Sachs. But they were wary of the impact of the upcoming U.S. presidential election, which could lead to more trade protectionism if Donald Trump is reelected, as well as signs of a weakening U.S. economy, which could erode external demand.
“We are seeing more focus on consumption, but property is still the focus,” Fu said. “Exports are a bright spot, but people have started to look at the potential risk of tariffs.”
However, analysts do not expect Beijing to launch any major unexpected stimulus. China’s central bank has eased monetary policy, but has been constrained by a wide interest rate spread with the United States, which could lead to capital outflows. If the Federal Reserve cuts rates, that could give China room to cut further.
Scholars believe that more radical structural changes are needed if China is to unleash the true potential spending power of its households.
In his speech, PBoC adviser Huang warned that a Japanese-style deflationary trap was a risk for China. He advocated focusing on achieving 2-3 percent inflation, changing the policy of “heavy on investment, light on consumption” and “giving money directly to the people” — a radical idea when Xi has warned against European-style “welfarism.”
Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, said that without policies to increase the share of households in China’s economy, efforts to subsidize leisure industries or consumer goods would not work.
“AVsceker years of supply-side ‘consumption improvements,’ consumption in China remains as weak as ever,” he wrote on social media platform X.
Yet while cadres may voice such warnings in Beidaihe, few expect Xi to radically change course and divert funds from his strategy of transforming China into a self-sufficient technological superpower.
“GDP growth is below what it could be, but… GDP growth is not everything,” Gavekal’s Batson said, describing the government’s thinking.
“The parts of the economy that the government favors, in terms of this long-term strategy, are doing quite well,” he added. “Exports continue to reach new highs. Manufacturing investment is expanding, the technical capabilities of Chinese companies are improving… So you can really sustain what you might call ‘strategic patience.'”
The bigger question, he said, was whether the environment that made this strategy possible—the benign international trade that absorbed Chinese exports—could continue indefinitely. As recent market turmoil and questions about the strength of the U.S. economy have shown, favorable conditions can evaporate quickly.
More information from Wenjie Ding in Beijing
