China’s economic growth has slowed down since April with still fragile economic recovery. Various economic indicators were just passable or below market expectations. Fu Linghui, spokesperson of China’s National Bureau of Statistics (NBS), recently warned that "recovery is facing challenges including a complex and grim international environment, weak momentum for global economic recovery and insufficient domestic demand”. UBS just cut its forecast for China’s GDP growth to 5.2% for 2023 and 5% for 2024. Standard Chartered also lowered China’s GDP growth forecast from 5.8% to 5.4%. China’s uncertain economic outlook has sparked widespread speculations that it may repeat Japan’s lost decades.
According to the data for May 2023 newly released by the NBS, China’s exports fell 0.8%, while imports grew 2.3%. The total retail sales of social consumer goods increased 12.7%, a drop of 5.7% compared to the previous month. Surveyed unemployment rate in urban areas nationwide was 5.2%, same as the previous month. Unemployment in urban areas fell slightly to 5.2% from 5.3% in March, but unemployment rate for youths between the ages of 16 to 24 hit a record high of 20.8%. Investment in property development from January to May dropped 7.2% compared to the same period a year earlier. Construction by property development companies measured by floor area fell 6.2%, and property sales by floor area declined 0.9%. The real estate development prosperity index stood at 94.56, the lowest since January. The sluggish housing market hinders China’s economic recovery. The relatively weak recovery of the real estate sector is a drag on consumption and investment in China.
The added value of industrial enterprises above designated size grew at a slower annual pace of 3.5%, lower than April’s 5.6% and the lowest for the past three months. Official manufacturing purchasing managers' index (PMI) slipped to 48.8, the lowest in five months. Manufacturing production index and new orders index were 49.6 and 48.3 respectively, a decrease of 0.6 and 0.5 from last month, indicating insufficient market demand for manufacturing and restrained release of production capacity. Moreover, China’s consumer price index (CPI) only grew at an annual rate of 0.2% in May, lower than the market expectation of 0.3%. Producer price index (PPI) saw an annual decrease of 4.6% in May, slipping further than the market forecast of 4.3% and lower than April’s 3.6%. The PPI fell for the eighth consecutive month and registered the largest decline in seven years. Countries around the globe are still in the middle of inflation. Even the deflationary Japan is experiencing inflation. China, however, is on the brink of deflation. The reasons behind this development are worth examining.
There are three major reasons behind China’s less-than-expected growth and its heading for deflation. First, China’s lifting of COVID control measures generated exploding consumption during this year’s Lunar New Year holidays, and the economic outlook was very promising. Why has the Chinese economy faltered since then? The main reason is that many Chinese people increase savings and abstain from spending because they hold pessimistic views about the future. According to the report of an urban depositor survey conducted by the People’s Bank of China (PBOC) in the fourth quarter of 2022, Chinese people were enthusiastic about saving money. The percentage of people who were in favor of more saving deposits reached 61.8%, the highest since the start of the survey. The amount of excessive savings converted into consumption was also lower than what was expected in early 2023. Stagnant consumption consequently influences price levels and may lead to deflation. Second, the housing market is an important engine driving China’s economic growth but has been sluggish in recent years. Beijing has taken various stimulus measures, but the effect has been limited, as evidenced by bleak housing data. Third, end demand in Europe and the U.S. is still weak. Supply chain inventory adjustment continues. Growth of global trade lacks enough momentum. All these factors contribute to China’s disappointing import and export performance.
Facing various uncertainties and unclear economic prospects, China set this year’s economic growth target at around 5% during the Two Sessions. It is a slightly modest goal, but Beijing has its own considerations. To reverse the economic downward trend, it is imperative for China to adopt new monetary and fiscal stimulus policies. In regard to monetary policies, the PBOC surprisingly cut its seven-day reverse repurchase rate on June 13th, the first reduction in the rate in ten months. Rate cuts are like bleeding, the goal of which is to inject market liquidity. It is highly possible that the PBOC will cut the reserve requirement ratio (RRR) and interest rate in the second half of this year, according to market expectations. In regard to fiscal policies, China’s National Development and Reform Commission (NDRC), Ministry of Industry and Information Technology, Ministry of Finance and State Administration for Market Supervision jointly issued a notice on lowering cost in 2023 on June 13th, releasing 22 measures in eight aspects. The notice mainly aims at announcing policies to reduce taxes and fees and improve tax incentives targeting a number of fields such as technology innovation and key industrial chains.
Moreover, Chinese Premier Li Qiang chaired a State Council executive meeting on June 16th to deliberate on policies and measures to promote sustained economic recovery. The NDRC revealed six key areas for actions soon afterwards, including formulating policies that restore and expand consumption. A series of polices and measures will be laid out in four aspects, including expanding macroeconomic management, increasing effective demand, strengthening and improving the real economy and preventing and resolving risks in key areas. China may allocate billions of dollars to fund new infrastructure projects and loosen regulations to encourage real estate investors to buy more properties. And about 1 trillion yuan of special sovereign bonds will be issued. China should be able to achieve its growth target and steer clear of repeating Japan’s lost decades if adopting the above policies and measures.
(Wo-chiang Lee, Professor of the Department of Banking and Finance at Tamkang University)
(Translated to English by Cindy Li)