Five months after Chinese President Xi Jinping declared victory over the pandemic and eased strict social controls, new data this week revealed that the country’s economy is far from fully recovering.
While consumers venture into spending, buyers shun real estate, one of the central growth drivers of the Chinese economy. Exports, another important driver, are falling as rising inflation abroad dampens demand for Chinese goods.
The government has already started cutting interest rates, but analysts said that fiscal stimulus, not monetary, will be needed to keep the recovery in the world’s second-largest economy on track. Here are the sectors that pose the biggest drag on the economy as well as those with the brightest outlook – and policymakers’ options for reviving growth.
Property warning signs
Analysts say China’s real estate sector, which accounts for about 30 percent of its economic output, is at the root of the economic turmoil. “It’s not an exaggeration to say that ownership at this point threatens the entire economic recovery,” said Chris Bedore, deputy director of China research at Gavekal Dragonomics.
Consumers are suspicious of the sector. Many apartments were bought before the buildings were even built, only to find that the properties were not delivered after a regulatory crackdown on leverage levels drove a number of developers into default.
The real estate market showed signs of stabilizing in the first quarter after a long slump, but has started to slide again in recent weeks.
Gavekal said sales, new project starts and floor space under construction all declined in May when measured as a share of seasonally adjusted 2019 levels before the pandemic. The research group added that completions slowed to 24 percent year-on-year, from 42 percent in the previous month.
Next week the government is expected to cut the five-year lending rate used to measure mortgages, but analysts said more measures are needed to revive the sector, such as credit for cash-strapped developers and incentives including cuts in mortgage payments.
Exports are slowing down dramatically
Exports fell 7.5 percent year-on-year in US dollar terms last month after rising 8.5 percent in April as slowing growth abroad hurt demand, wiping out what was a critical lifeline for the Chinese economy during the depths of the pandemic.
Analysts said the weakness in exports and property may also have extended to industrial production, which slowed in May. To cap it off, private investment in fixed assets also turned negative for the first time in over a decade — barring the start of the pandemic in 2020 — indicating that companies weren’t investing.
“The manufacturing sector is dead on its feet at the moment and exports are weak,” said Rob Carnell, head of research in Asia Pacific at ING. There could be a structural shift, he added, with US export restrictions on high-tech goods, particularly semiconductor components and chipmaking equipment, affecting China’s trade with regional powers such as South Korea, Japan and Taiwan.
Policymakers could choose to stimulate trade by tolerating a weaker renminbi. Low interest rates will support this tactic – after the People’s Bank of China cut its main policy rate on Thursday, the currency fell 0.3 percent against the dollar to 7.1807 renminbi, its lowest level in six months and puts it down about 4 percent for a year so far.
Retail sales are a beacon of hope
The best hope for reviving growth across the economy, economists said, is to support strong domestic demand, which would lead to a tighter job market, higher salaries and eventually a return of confidence that could spill over into real estate and manufacturing.
Retail sales expanded 12.7 percent year on year as fussy consumers returned to stores after tough restrictions against the pandemic last year. But on a seasonally adjusted basis, the metric has fallen month by month, economists said, as the post-reopening boost began to fade. Food was the strongest item, followed by car purchases, aided by incentive policies and discounts.
Infrastructure is losing momentum
Infrastructure investment grew 8.8 percent in May year on year, according to economists. But analysts cautioned that the metric has also lost steam compared to last year, when it was growing at about 10 percent, and growth in this sector may not have been strong enough to offset weak real estate and exports.
“Infrastructure investment momentum is slowing,” said Michelle Lam, senior China economist at Société Générale, which she attributed to “weak land sales from local governments.”
Beijing will need to turn to infrastructure to spur growth, economists said, suggesting policymakers could unlock local government private bonds (LGSBs) to stimulate investment.
Analysts at Nomura have predicted that this could amount to an additional Rmb500 billion ($70 billion) in LGSBs, in addition to the untapped portion of this year’s annual quota of Rmb1.86 trillion. The bank also indicated that Beijing may consider issuing special central government bonds to raise additional funds.
“Bazooka” is not expected.
China’s economic recovery is fragile – a challenge the government itself has acknowledged. “The foundation for the economic recovery is not yet solid,” the National Bureau of Statistics said this week.
More stimulus will be needed to restore growth to pre-pandemic levels, and the central bank is expected to enact further rate cuts, which will be accompanied by tax breaks and other support for small businesses.
Tao Wang, chief China economist at UBS, said the government should prioritize putting a floor under the problems of the real estate sector. “Otherwise, it is very difficult to stabilize the economy as a whole,” she warned.
Despite the critical hurdles to recovery, there is little expectation of a “big bang”-style stimulus.
In the past, China has invested in the real estate sector to overcome the downturn. But Beijing has long made clear its view that “homes are for living in, not for speculation,” tempering expectations of a glut of activity in the sector to drive growth.
“‘Bazooka’ policies in the past have usually helped the property developer sector and I don’t think Xi wants to do that,” said ING’s Carnell.