BEIJING: As China grapples with weakening economic momentum, a slew of economic data released on Monday is expected to underscore the waning post-pandemic bounce, raising concerns over the need for Beijing to implement further stimulus measures to support economic activity and boost fragile consumer confidence.
Despite a strong start to the year following the easing of stringent COVID-19 measures, recent indicators point to a sharp loss of economic momentum attributed to weak domestic and international demand, as well as an extended downturn in the country’s property market—a crucial driver of growth in the past.
According to economists polled by Reuters, the world’s second-largest economy likely recorded a mere 0.5% growth in the second quarter on a seasonally adjusted basis, compared to the previous three months. Additionally, separate data for June is anticipated to show a continued cooling trend in industrial output, retail sales, and investment.
Pandemic Effects on China’s Economy
Economists have attributed the economic slowdown to the lasting effects of previous COVID-19 restrictions and regulatory constraints imposed on the property and technology sectors. Despite recent efforts by the government to ease some restrictions to support the economy, cautious households and private businesses are increasingly focused on saving and debt repayment rather than making new purchases or investments. Youth unemployment has also reached record highs.
Comparatively, China’s gross domestic product (GDP) is expected to have grown by 7.3% in the second quarter compared to the same period last year, following growth of 4.5% in the first quarter. However, this year-on-year comparison will be heavily influenced by the significant slump in activity experienced during the COVID-19 lockdowns in spring 2022.
Earlier data released on Thursday indicated a sharp decline in China’s exports, with a worse-than-expected 12.4% year-on-year drop in June, adding further strain to the already stressed economy due to cooling global demand.
The property sector, which accounts for a significant portion of economic activity, continues to show weakness, with June data revealing unchanged new home prices and a nationwide slowdown in price increases—marking the weakest result so far this year. In addition, producer prices experienced their fastest decline in over seven years in June, and consumer prices teetered on the verge of deflation, further highlighting economic challenges.
China Likely to Introduce More Stimulus Measures
In response to the weakening economic conditions, authorities are expected to introduce additional stimulus measures, including increased fiscal spending for infrastructure projects, enhanced support for consumers and private firms, and potential easing of property policies, according to policy insiders and economists. However, analysts caution that a quick turnaround is unlikely.
China’s central bank, in its effort to weather the challenges, has indicated the use of policy tools such as the reserve requirement ratio (RRR) and the medium-term lending facility. Analysts polled by Reuters anticipate a 25 basis point reduction in the RRR during the third quarter, freeing up more funds for lending while keeping benchmark lending rates steady. The central bank had previously cut the RRR in March.
While the central bank has also implemented a modest 10 basis point reduction in benchmark lending rates in June—the first reduction in 10 months—it is expected to exercise caution in further rate cuts. Analysts argue that continued easing measures may hinder banks already facing margin pressures, as private companies and households remain reluctant to borrow. Furthermore, aggressive easing could lead to increased capital outflows from China’s struggling financial markets and put pressure on the yuan currency, which recently reached eight-month lows.
