China’s economy loses momentum
Xi Jinping is in trouble. His policy to turn the economy away from debt-driven investment towards domestic consumption has not been successful due to the inability of the leadership to expand social welfare and health care provisions, leading to high levels of precautionary savings.
Xi Jinping’s emphasis on promoting state-owned enterprises at the expense of the private sector is unlikely to revitalise economic growth as the productivity of these corporations is much lower than that of private firms in China.
The Chinese economy is now facing an extended period of weak growth due to the loss of demographic dividend, pushing away from capital-intensive growth, and a gradual deceleration in productivity growth.
The government’s ‘Common Prosperity’ policy and efforts to increase consumption are not backed by structural economic reforms, which have been stalled due to the high total debt of the country, estimated at around 350 per cent of GDP.
With worsening economic imbalances, China’s economy continues to lose momentum. China’s retail sales in June fell to 3.1 per cent from a 12.7 per cent increase in May, according to the National Bureau of Statistics (NBS) report.
Disappointing June data, including low retail sales, falling export orders and slow industrial production indicate stalled economic recovery. Though industrial output growth quickened to 4.4 per cent in June from 3.5 per cent in May, the demand remained tepid. Even though investment by state-owned enterprises grew by 8.1 per cent in the first six months of 2023, private fixed-asset investment shrank by 0.2 per cent, indicating weak private business confidence. Khabar Hub reported.
China’s exports fell by 12.4 per cent in June, the highest drop in three years, while imports fell by 6.8 per cent. It’s foreign trade is likely to face more headwinds in the second half of the year, due to high inflation in developed countries and geopolitical situation.
Foreign Direct Investment (FDI) inflows also dropped by 5.6 per cent in the first five months of the year. The perception that “doing business in China has become much riskier” is choking the flow of capital into the country.
China’s equity market has been underperforming compared to other global markets this year, suggesting that weak growth prospects and lack of policy stimulus have already been fully priced.
Chinese stocks have fallen more than 20 per cent from their peak in late January. IPO applications slumped by a third in the first half of 2023, as volatility in earnings, a slowing economy and tighter regulatory scrutiny deterred companies.
The zero rate of inflation in June and falling factory-gate prices have fueled concerns about the risk of deflation.
Domestic travel spending during the June holiday this year for the dragon-boat festival was lower than pre-pandemic levels. Car sales and residential real estate sales declined despite the traditionally busy season.
Expansion in the services industry has slowed as well. The revenue of the service sector, which is dominated by small, midsized and individual businesses, has fallen substantially. This has made this sector cautious about hiring and expansion since the removal of zero-Covid restrictions.
If the economy continues to lose momentum in the long term, the unemployment problem is likely to get more serious, which would challenge the social stability in the country. Due to the pessimism among the population regarding the state of the economy, domestic consumption has remained weak.
Local governments are themselves under financing pressure. They had come to rely on land sales for revenue, but that source of revenue is also drying up due to the housing downturn.
It is becoming more difficult for the Xi Jinping-led government to find a solution to the slowing economy.
