China’s economic growth fell in the spring after a strong start to the year, data showed Monday, as a property crash prompted consumers to spend more cautiously.
The latest growth figures from the world’s second-largest economy, covering the April-June period, put more pressure on the Communist Party as its leaders gathered in Beijing on Monday for a four-day conclave to chart a course for the country’s economic future.
In a country known for tightly controlling the flow of information, the Chinese government is exercising particularly tight surveillance ahead of the third plenum, which typically takes place every five years. China’s statistics bureau has canceled its usual news conference that accompanies the release of economic data, and Chinese companies are largely avoiding reporting their results this week.
China’s economy expanded 0.7 percent in the second quarter from the previous three months, slightly below expectations of most Western economists, according to China’s National Bureau of Statistics. Looking at the full year, the data shows that China’s economy expanded at an annual rate of about 2.8 percent in the spring, just under half of its growth rate in the first three months of this year.
The statistics office also revised down its growth estimate for the first quarter. The growth rate, projected for the whole year, is around 6.1%, not the 6.6% it had forecast in April.
Xi Jinping, China’s top leader, is trying to win confidence in his policies both domestically and internationally as growth weakens and the housing market suffers.
China has tried to offset the slowdown in real estate activity. Companies are building more factories (new manufacturing investment jumped 9.5% in the first half of this year) and increasing exports.
But the rapid expansion of manufacturing has led to a glut of goods, from chemicals to cars, and a lot of unused industrial capacity. Companies have slashed prices to attract consumers, who nevertheless remain reluctant to spend, a long-standing problem for an investment-driven economy.
Meanwhile, China’s record export surge is provoking a global response in the form of tariff hikes, as countries fear the influx of Chinese goods will overwhelm local industries. Yet in China, the additional export revenues have not been enough to fully offset weak domestic consumer spending, leading to a slowdown that is posing a challenge for Chinese leaders as ordinary citizens are strained and foreign investors are disillusioned.
The statistics bureau summed up the state of the economy with a cautious statement. Progress has been made in the upgrading of China’s industries, it said, while adding that “the external environment is intertwined and complex, domestic effective demand remains insufficient, and the foundation for sound economic recovery and growth needs to be further strengthened.”
The slowdown in growth is less visible in the Chinese government’s favorite statistic: the economy’s growth in the second quarter of this year compared with the same period last year. That measure shows the economy expanded 4.7% over the past 12 months, compared with a 5.3% year-on-year expansion in the previous quarter.
The Chinese government has set a growth target of “around 5%” this year.
The government is trying to boost consumption. Retail sales rose just 2% in June from a year earlier as consumers became more cautious. Car sales fell 6.2% in June from a year earlier, partly because automakers cut prices to attract buyers.
Economists in China and abroad say Beijing should significantly increase pensions, health insurance and welfare benefits. Such measures could be financed by reducing China’s military buildup or by transferring dividends and shares of state-owned enterprises to the national pension fund. But the government has been reluctant to reallocate large sums of money from government agencies or state-owned enterprises.
Few expect radical changes at the Communist Party conclave. The country continues to pursue an investment-driven strategy that focuses on building new buildings rather than spending money on consumers.
This trend was on display recently at a party in Nanchang, a city in south-central China. The Wanshou Palace area has been completely renovated with cobblestone walkways, free concerts and numerous shops and restaurants. Crowds of tourists wandered the streets to take pictures, but almost no one entered the shops or restaurants to spend money.
Recent local government measures have deprived households of money, further reducing their ability to spend. Faced with falling revenues due to the housing crisis, local governments have stepped up tax collection and audits and have begun raising rates for services such as natural gas, water, and sometimes rail transportation.
Many consumers say they buy the cheapest products to get the most out of their budget. Gong Yilan, a 21-year-old teacher, paid the equivalent of $3.40 for a pair of blue earrings as a souvenir during a vacation in Jingdezhen, another city in south-central China.
“If I spend too much money on expensive things, I don’t have enough money to fund my next trip,” she said.
Local authorities are facing financial difficulties, mainly due to a decline in sales of public land to developers. Builders are struggling to complete promised housing and have little money to invest in land for future projects.
“Simply put, with around 20 million unfinished and pre-sold homes with delayed deliveries, the housing crisis is not over yet,” Japanese bank Nomura said in a research report released Wednesday.
Until recently, housing construction was one of China’s largest industries, creating millions of jobs. Apartment sales finally appear to be stabilizing after three years of decline, but at a very low level. As in many countries, the commercial real estate sector is also starting to struggle in China.
Chinese construction companies are trying to cope not only with a slowdown in domestic construction but also with fewer foreign orders. China has limited lending to developing countries in recent years as many of those borrowers have struggled to repay previous loans.
Zhongmei Engineering Group, a Chinese construction company based in Nanchang, used to do up to 40% of its projects overseas, mainly in Africa. But these projects now account for less than 20% of its business.
“They don’t have the financial means to hire our company,” said Qin Jian, general manager of Zhongmei’s international operations.
Like many Chinese construction companies, Zhongmei has turned to building new infrastructure and factories in China. Beijing has helped local governments borrow money to finance new sewers, water pipes, roads and other infrastructure.
China may have so much excess industrial capacity that the economy could experience widespread price declines—a dangerous phenomenon known as deflation. Lower prices prompt consumers to delay purchases in hopes of getting better deals later and make it harder for borrowers to earn enough to repay their debts. China’s overall debt level is higher than in the United States relative to the size of its economy, largely because of heavy borrowing by state-owned enterprises. Many Chinese are struggling to pay mortgages on homes that are falling in value.
The National Bureau of Statistics said Wednesday that wholesale prices charged by factories, farms and other producers fell 0.8 percent in June from a year earlier. Consumer prices continue to rise, but barely: They rose just 0.2 percent last month from a year earlier.
There have been two bright spots in the Chinese economy in recent weeks, however. The decision to no longer require visas for tourists from European countries, Australia and New Zealand led to an immediate surge in international visitors. Hotels in the heart of Shanghai and Beijing have raised their prices sharply. But even a few miles away, hotels are still charging rates that have barely increased since the worst days of the Covid-19 pandemic.
The boom in manufactured exports has been a much bigger factor for China’s economy. The country’s overall trade surplus (the difference between exports and imports) hit a record $99 billion last month.
Read you contributed research.