A series of underwhelming economic data from China in May has sparked hope for significant policy interventions.
Market analysts are eagerly awaiting the next steps from China’s State Council and a Politburo meeting in July, where the Communist Party’s top officials will assess the country’s economic performance in the first half of the year.
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China’s National Statistics Bureau cautioned on Thursday about “increasing pressure … in domestic structural adjustment” in the world’s second-largest economy. Data on industrial production, fixed asset investment, retail sales, and trade all fell short of expectations, indicating that China is on the verge of deflation as its post-pandemic economic recovery falters.
“At the moment, they are likely considering an extensive stimulus package to boost investment and consumption through measures such as interest rate cuts,” stated Bank of America’s chief China economist, Helen Qiao, in an interview with CNBC on Thursday.
She added, “They are probably also considering implementing a consumer voucher program and increasing the fiscal deficit to make fiscal policy more expansionary. However, these measures require careful preparation before implementation; they are not immediately available.”
Rate cuts are just the beginning
Economists view both rate cuts made this week as mostly symbolic, but they highlight the urgent need for action.
“Weak investment data suggest that the authorities are unlikely to stop at the monetary easing we witnessed this week,” wrote Louise Loo, lead economist at Oxford Economics, in a note following China’s data release on Thursday.
She pointed to examples such as the 7.2% decline in cumulative property investment in China during the first five months of this year, a faster rate than the 6.2% decline recorded in the January-April period.
A job fair in China’s southwestern city of Chongqing on April 11, 2023. Unemployment among young people aged between 16 and 24 hit another record in May at 20.8% — four times the urban jobless rate for people of all ages at 5.2%.
Str | Afp | Getty Images
“This suggests that while investments had been state-led so far, it has not been effective in crowding in private investments or lifting overall business sentiment,” she added.
“Therefore, we expect to see announcements of further ‘piecemeal’ easing measures in the property sector in the coming weeks,” Loo wrote.
“These measures could include further easing of home purchase restrictions, a more aggressive push for public housing, and support for the funding conditions of property developers.”
Consumer spending and employment
Last month, Goldman Sachs economists stated that reintegrating young people into the workforce would significantly boost China’s economic recovery, as they account for nearly 20% of consumption in the country.
Retail sales, a crucial indicator of consumer confidence, grew by 12.7% in May, missing consensus expectations of 13.6% growth and slowing down from April’s 18.4%.
“Consumer spending in China is a variable that kicks in during the later stages of the business cycle,” explained Bank of America’s Qiao. “In other words, consumers must wait until they have better job security and income expectations before feeling comfortable enough to spend more.”
While youth unemployment is a structural issue, economists believe there is room for additional policy stimulus to address cyclical problems in the short term.
“Currently, when we look at CPI inflation, profitability in the corporate sector, and the labor market, it appears that the only explanation is a large output gap from a cyclical perspective,” Qiao stated.
Output gap refers to the disparity between an economy’s actual output and its potential output at full capacity.
“Policy stimulus is highly warranted and needs to be implemented to boost the economy back to its long-term potential,” she added.
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