China's Economic Woes: Second-Quarter GDP Growth Slumps To 4.7 Per Cent, Threatening 5 Per Cent Annual Target

Once the envy of all, China’s economy now finds itself in the doldrums. With lackluster household expenditure, a depressed property sector, and rising social unrest, time is running out for China to get its economic affairs in order.

Recent data suggests that China’s second-quarter gross domestic product (GDP) growth has fallen sharply below expectations. At 4.7 per cent, it marks a downtick of 0.6 percentage points compared to the economy’s performance in the previous quarter, and calls into question the Chinese government’s goal of achieving 5 per cent growth this financial year.

The reassurances given by government spokespersons regarding China’s post-pandemic recovery appear hollow in the face of growing social tensions. As an article from the Financial Times highlights, the recent spate of stabbings in the country can be construed as an indicator of deep dissatisfaction and anger over the state of the economy. It is not uncommon for economic discontent to manifest as paroxysms of violence.

Unfortunately for China, there are no straightforward solutions to its economic malaise. For instance, in an effort to boost consumer spending, “Chinese leaders have taken a series of small steps to juice growth, including cutting interest rates and doling out cheap loans to banks to spur lending to households and businesses,” says the Wall Street Journal.

However, given that the Chinese economy is experiencing a prolonged period of deflation, it is unlikely that firms and households will be willing to borrow and invest, as further reductions in price levels will make the amount they owe — in real terms — greater than the amount they have borrowed.

Further, many of the causes of China’s economic woes are structural, meaning that it will take time for the positive effects of any remedy to be felt, and there will undeniably be significant short-term repercussions.

The unsustainable debt levels of local governments is an oft-cited example of one such structural cause, but financing their debt would likely require raising property or consumption taxes — something that would only aggravate weak spending and elicit greater ire.

The current growth strategy that the Chinese government is pursuing — investing more money in manufacturing, industrial production, and exports — doesn't seem to be doing the trick. Even before the pandemic, concerns over Chinese dumping were rife, and distrust of the country has only grown since.

Moreover, its aggressive posturing in the South China Sea and intimidation of Taiwan do not bode well for its trade relations with the West, not to mention the clear and present danger a second Trump administration would pose to its bilateral trade with the United States.

In other words, either Xi Jinping has to accept that he cannot have his cake and eat it too, or he has to come up with a different strategy to prop up the Chinese economy.

Indeed, the government’s manufacturing push will likely prove inadequate with regards to bolstering the economy if other areas do not improve commensurately.

As of March 2024, China’s Ministry of Finance announced it would be setting aside $1.45 billion USD “to rebuild industrial foundations and promote high-quality development of the manufacturing sector.” But with weak domestic demand, economists are sceptical about how much of a positive impact China’s manufacturing investments will have if consumption support remains low on the government’s list of priorities.

As HSBC economists have noted, “unless demand keeps pace with investment, and does sustainably so, a harsh adjustment ultimately beckons.”

Keyu Jin, a Chinese economist and associate professor at the London School of Economics, has expressed similar concerns: “China has now moved upward in global value chains through green tech and advanced manufacturing. But that is a long-term plan, which does not address short-term demand issues that the country faces.”

As the Chinese Communist Party gathered for its Third Plenum, many were desperately hoping that meaningful short-term and long-term economic policies would be announced to revive the economy, including a stimulus package to get expenditure rolling.

However, that would require acknowledging that there is a significant problem in the first place and possibly administering a “strong medicine” to cure the economy of its many maladies. Based on the first wave of articles that has come out following the plenum, it looks like such hope was in vain.