China’s economy stumbled in the second quarter, official data showed, just as the country’s top leaders gathered for a key meeting to address its sluggish growth.
It rose 4.7% in the three months to June, falling short of expectations after one the strongest start to the first three months of 2024. The government’s annual growth target is around 5%.
“China’s economy hit the brakes in the June quarter,” said Heron Lim at Moody’s Analytics, adding that analysts are hoping for resolution from the meeting taking place in Beijing, also called the Third Plenum.
The world’s second-largest economy is grappling with a protracted property crisis, huge local government debt, weak consumption and high unemployment.
Past Plenum results have changed the course of history in China – 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.
And so are expectations for this year’s Plenum, where Xi is presiding over a closed-door meeting of more than 370 high-ranking members of the Chinese Communist Party.
The rhetoric on state-controlled media has certainly been encouraging.
An editorial in The Global Times said a “wide range of reform-focused policies” are “high on the agenda” and would open a “new chapter”. Xinhua referred to the “comprehensive” and “unprecedented” reforms. The editorial in the People’s Daily was titled “a new era of reform and opening up,” invoking the phrase Deng himself coined in 1978.
Observers, however, are not sure how much room there is for bold ideas or debate in the Party under Mr. Xi’s highly centralized leadership. Some see the meeting as a simple exercise in decisions that have already been made.
Economists are also skeptical that the meeting will yield a quick solution.
It has “little impact on short-term growth,” says Qian Wang, chief Asia-Pacific economist at Vanguard, because its focus will be on longer-term and more important reforms to “unleash long-term growth potential.”
However, analysts will be looking for announcements that signal the Party’s economic priorities.
Separate data on Monday showed that prices for new homes in June fell at the fastest pace in nine years.
This is more evidence of the crisis that has engulfed China’s property sector and led to the collapse of giants such as Evergrande. The fear is that it could spread to other parts of the economy.
“There are more than 4,000 banks in China and over 90% are smaller, regional banks that are heavily exposed to the housing market and local government debt,” says Shanghai-based economist Dan Wang.
She believes that party leaders will “push for the consolidation of small banks”.
Another issue is falling prices – a symptom of weak demand.
Producer prices continued to fall in the last month, while consumer prices rose by just 0.2%, the slowest pace in three months.
Meanwhile, retail sales in June rose just 2%, below expectations and a sign that consumers are still cautious about spending and uncertain about the future.
“A major concern is the loss of confidence of households, business and investors in the government’s ability to navigate the dangerous economic environment,” said Eswar Prasad, former head of the International Monetary Fund’s China division.
Still, questions remain about Beijing’s willingness to offer the kind of solution that would satisfy observers and markets.
“The government is reluctant to resort to short-term stimulus plans such as cash transfers to households,” Dan Wang said. “Instead, we expect them to once again emphasize strengthening supply chains and high technology.”
This is in line with Beijing’s bets on high-tech industries such as renewable energy, artificial intelligence and chipmaking, and exports to revive the economy. Last month, China reported a record trade surplus – $99bn (£76.4bn) – as exports rose and imports suffered.
But even that bet faces challenging odds. Major trading partners such as the European Union and the United States have imposed tariffs and other barriers on goods made in China, from electric vehicles to advanced chips.