Global Courant
A string of weak Chinese economic data in May has raised hopes for decisive policy intervention.
Market watchers anticipate the next steps from China’s State Council and a Politburo meeting in July where the Communist Party’s top will review the country’s economic performance in the first half of the year.
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China’s National Bureau of Statistics on Thursday warned of “increasing pressures … in domestic structural adjustment” in the world’s second-largest economy. A slew of economic data, from industrial production and fixed asset investment to retail sales and trade, fell short of expectations, with China teetering on the brink of deflation as its post-pandemic economic recovery stagnates.
“I think right now they’re probably considering some general kind of stimulus package to boost not just investment, but also consumption through measures like rate cuts,” Bank of America chief economist Helen Qiao told CNBC on Thursday.
“At the same time, they are probably considering (a) consumer voucher program and thinking about increasing the budget deficit to make fiscal policy more expansionary,” she added. “But having said that, a lot of this needs to be prepared and then rolled out. It’s not something that’s readily available.”
Interest rate cuts are just the beginning
Economists viewed both moves as largely symbolic this week, but they underline the urgency of the situation.
“Weak investment data suggests authorities are unlikely to stop the monetary easing we have seen this week,” Louise Loo, chief economist at Oxford Economics, wrote in a note following Thursday’s China release.
She cited examples like the 7.2% decline in cumulative real estate investment in China in the first five months of this year — a faster pace than the 6.2% decline in the January-April period.
A job fair in China’s southwestern city of Chongqing on April 11, 2023. Unemployment among young people aged 16 to 24 hit another record high of 20.8% in May — four times the city’s unemployment rate for people of all ages at 5.2 %.
St | Afp | Getty Images
“This suggests that while investment has so far been led by the state, it has not been effective in crowding out private investment or improving overall business sentiment,” she added.
“We therefore continue to expect announcements of further easing measures in the real estate sector in the coming weeks,” Loo wrote.
“And these could include further easing of home purchase restrictions, a more aggressive public housing policy push and support for developer financing conditions.”
Consumption and employment
Goldman Sachs economists said last month that getting young people back to work would boost China’s economic recovery, as they account for nearly 20% of China’s consumption.
Retail sales, a key measure of consumer confidence, rose 12.7% in May, beating consensus expectations for 13.6% growth and slowing from April’s 18.4%.
“Consumption is still a late cycle variable for China, one that represents changes in the business cycle,” said Bank of America’s Qiao. “In other words, consumers should wait until they get more job security and income expectations, and then[will]be comfortable spending more.”
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While youth unemployment is a structural problem, economists say there is room for more policy stimulus to solve short-term cyclical problems.
“Right now, if you look at CPI inflation and also profit/loss making in the corporate sector and the labor market, I don’t necessarily think there’s another explanation, but cyclical we have a very large output gap ,” Qiao said.
The output gap refers to the difference between an economy’s actual output and potential output at full capacity.
“Policy stimulus is well justified and needs to be rolled out to get out of trouble, to bring the economy back to its long-term potential,” she added.
