China's Economy Slows, Prompting Anticipation of New Stimulus Measures

 China’s economy experienced a more significant slowdown than anticipated in the June quarter, increasing expectations that top officials meeting in Beijing this week will announce new measures to boost growth.

The world’s second-largest economy grew by 4.7% from April to June compared to the previous year, as reported by the National Bureau of Statistics on Monday. This figure is down from the 5.3% growth seen in the March quarter and below the 5.1% forecasted by economists.

The property sector continued to decline, with sales of new commercial buildings dropping 25% in the first half of 2024. Retail sales in June also fell by 0.12% from May, highlighting weak consumer sentiment, which poses a challenge for China to achieve its annual GDP growth target of about 5%.

Despite the weak quarterly performance, a record trade surplus of nearly $100 billion in June, driven by surplus manufactured goods being shipped overseas, provided some support. However, the potential for rising trade barriers, especially if Donald Trump is re-elected as U.S. president, adds pressure on Chinese leaders to stimulate domestic growth.

The economic figures were released as top Chinese officials convened in Beijing for a significant political meeting historically associated with major economic policy announcements.

Harry Murphy Cruise, an economist with Moody's Investor Services, emphasized the need for the meeting, known as the third plenum, to address these economic trends. However, he noted that substantial policy shifts might not occur, as such changes could be perceived as admissions of failure. Instead, modest policy adjustments focusing on high-tech manufacturing and support for housing and households are more likely.

President Xi Jinping is overseeing the Communist Party's secretive gathering, with few indications of the potential agenda.

State media in June indicated that the delayed four-day meeting would primarily focus on issues related to deepening reforms and advancing Chinese modernization. Xi has mentioned plans for "major" reforms.

Analysts hope these promises will lead to much-needed economic support. Sarah Tan and Harry Murphy Cruise from Moody's Analytics urged Beijing to reform the property sector, ease internal migration restrictions, create high-skilled jobs for graduates, and modify the tax system to reduce local government debt. However, they predicted only modest policy tweaks rather than sweeping reforms.

The People’s Daily, the Communist Party’s official newspaper, hinted at limited expectations by stating that "reform is not about changing direction and transformation is not about changing color."

Ting Lu, chief China economist at Nomura, suggested the meeting would focus on long-term ideas and structural reforms rather than short-term policy changes.

The third plenum has historically been a platform for significant economic policy shifts. In 1978, then-leader Deng Xiaoping used the meeting to announce market reforms that spurred rapid economic growth. More recently, the 2013 plenum saw pledges to give the free market a "decisive" role in resource allocation and other significant changes to economic and social policy.

Authorities have been clear in their intent to shift the economy away from state-funded investment towards high-tech innovation and domestic consumption. However, economic uncertainty has kept consumption low.

The property sector remains one of the most pressing issues, having been a key growth driver but now struggling with debt and potential liquidations among top firms. Recent government efforts have aimed to ease developer pressure and restore confidence, including encouraging local governments to purchase unsold homes.

NAB senior economist Gerard Burg noted that the property sector had contracted year-on-year for the past 28 months. Investment in real estate fell 7.4%, an acceleration from May’s 4.7% decline compared to the previous year.

Retail sales in June, after adjusting for inflation, were 1.8% higher than in June 2023. This was the weakest result since December 2022, a month affected by the Omicron wave of Covid-19 and the abrupt end of zero-Covid policies.

"This continues to point to the soft domestic demand conditions that have persisted since the pandemic," Burg said.

Analysts agree that more substantial measures are needed for a full economic rebound, as China’s economy has not fully recovered more than 18 months after the end of stringent Covid-19 restrictions.