China’s economy stumbled in the second quarter, according to official data, just as the country’s top leaders gathered for a key meeting to address its sluggish growth. The economy grew 4.7% in the three months to June, falling short of expectations after a stronger start in the first quarter 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 solutions from the ongoing meeting in Beijing, also known as the Third Plenum.
The world’s second-largest economy is grappling with a prolonged property crisis, steep local government debt, weak consumption, and high unemployment.
Past outcomes of the Plenum have historically changed the course of China: in 1978, then-leader Deng Xiaoping began opening China’s markets to the world, and in 2013, President Xi Jinping hinted at loosening the controversial one-child policy.
There are high expectations for this year’s Plenum, where Xi is presiding over a closed-door gathering of more than 370 high-ranking Chinese Communist Party members.
State-controlled media rhetoric has been encouraging. An editorial in The Global Times said a “wide range of reform-focused policies” are “high on the agenda” and would usher in a “new chapter.” Xinhua referred to “comprehensive” and “unprecedented” reforms, while the People’s Daily editorial highlighted a “new era of reform and opening up,” invoking Deng’s phrase from 1978.
However, observers are unsure of how much room there is for bold ideas or debate under Xi’s heavily centralized leadership. Some view the meeting as a rubber-stamping exercise for pre-made decisions.
Economists are also skeptical about the meeting’s immediate impact on growth. Qian Wang, Asia Pacific chief economist at Vanguard, said it has “little impact on near-term growth” since its focus will be on longer-term reforms to “unleash the long-term growth potential.”
Still, analysts will be watching for announcements signaling the Party’s economic priorities. Separate data on Monday showed that new home prices in June fell at the fastest pace in nine years, highlighting the crisis engulfing China’s property sector and the potential for broader economic repercussions.
“There are more than 4,000 banks in China and over 90% are smaller, regional banks which are highly exposed to the housing market and local government debt,” said Shanghai-based economist Dan Wang, predicting Party leaders will “push for consolidation of small banks.”
Another issue is falling prices, indicative of weak demand. Producer prices continued to drop last month, while consumer prices rose by just 0.2%, the slowest pace in three months. Retail sales in June grew by just 2%, below expectations, signaling that consumers remain cautious about spending and uncertain about the future.
“A major concern is the loss of household, business, and investor confidence in the government’s ability to navigate the perilous economic environment,” said Eswar Prasad, former head of the International Monetary Fund’s China division.
Questions remain about Beijing’s willingness to deliver solutions that satisfy observers and markets. “The government is reluctant to turn to short-term stimulus plans such as cash transfers to families,” Dan Wang said. “Instead, we expect them to stress once again on bolstering supply chains and high tech.”
This aligns with Beijing’s focus on high-tech industries such as renewable energy, artificial intelligence, and chip-making, and exports to revive the economy. Last month, China reported a record trade surplus of $99 billion (£76.4 billion) as exports soared and imports struggled.
However, this strategy faces challenges. 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.
