A string of weak Chinese economic data in May raised hopes for decisive policy action.
Market watchers expect further action from China’s State Council and Politburo meeting in July, during which top Communist Party officials will assess the country’s economic performance in the first half of the year.
China’s National Bureau of Statistics warned on Thursday of “increasing pressure … for domestic structural adjustment” in the world’s second-largest economy. Lots of economic data from industrial production and fixed asset investment to retail sales and trade fell short of expectations with China teeters on the brink of deflation as its post-pandemic economic recovery stalls.
“I think at this point they’re probably looking at an overall kind of stimulus package that would support not only investment but also consumption through measures like interest rate cuts,” Bank of America chief economist Helen Qiao told CNBC on Thursday.
“At the same time, they are probably considering [a] the consumer voucher program and thinking about increasing the fiscal deficit by making fiscal policy more expansionary,” she added. “But a lot of it needs to be prepared and then implemented. It’s not something that’s readily available.”
Economists saw both moves this week as largely symbolic, but they underscore the urgency of the situation.
“Weak investment data suggests the authorities are unlikely to stop the monetary easing we’ve seen this week,” Oxford Economics chief economist Louise Loo wrote in a note after Thursday’s release of Chinese data.
She gave examples such as 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 recorded in the January-April period.
A job fair in the southwestern city of Chongqing, China 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 unemployment rate for people of all ages category with 5.2%.
Str | Afp | Getty Images
“This suggests that while investment has so far been state-led, it has not been effective in crowding out private investment or lifting overall business sentiment,” she added.
“Therefore, we continue to expect announcements of further ‘tentative’ measures to ease the real estate sector to follow in the coming weeks,” Loo wrote.
“And that could mean further easing of restrictions on home purchases, more aggressive policy pressure on public housing and support for developer financing terms.”
Unemployment among young people aged 16 to 24 in May it hit a new record high of 20.8% – four times the urban all-age unemployment rate of 5.2%.
Economists at Goldman Sachs said last month that the return of young people to work would significantly boost China’s economic recovery, given that they account for nearly 20% of China’s consumption.
Retail sales, a key gauge of consumer confidence, rose 12.7% in May, missing consensus expectations for a 13.6% increase and slowing from April’s 18.4%.
“Consumption is still a late-cycle variable for China that is related to changes in the business cycle,” Bank of America’s Qiao said. “In other words, consumers have to wait until they have better job security and income expectations, and then they [will be] convenient to spend more.”
While youth unemployment is a structural problem, economists say there is room for more policy stimulus to address cyclical problems in the shorter term.
“At the moment, if you look at CPI inflation and also the creation of profits/losses in the corporate sector and also in the labor market, I don’t think there is any other explanation, but cyclically speaking, we have a very large output. gap,” Qiao said.
The output gap refers to the difference between the actual output of the economy and its potential output at full capacity.
“Policy stimulus is well-justified and must be put in place to get out of the blues and boost the economy back to its long-term potential level,” she added.