China’s Economy Slowed Further in August, Extending Gloomy Summer Slide Data show weakness across the board, igniting fresh calls for more support to fend off the threat of a Japan-style slide into deflation By Jason Douglas Follow Updated Sept. 13, 2024 10:47 pm ET
Beijing is trying to make up for weakness at home by juicing factory output.
China’s economic plight is deepening, heaping pressure on Beijing to step up support for households or risk getting stuck in a low-growth rut beset by tumbling prices and squabbles over trade.
Figures published Saturday showed activity weakening across the board in August, with home prices recording their steepest annual fall in nine years.
Beijing has signaled more help is on the way. But the policies being floated, such as cuts to banks’ reserve requirements, add to a menu of piecemeal measures rolled out in the past year or two that have so far failed to kick the economy into higher gear.
China’s leaders instead remain wedded to their longer-term goal of fashioning China into a technological colossus impervious to Western meddling, even if that comes at the expense of short-term growth or rebalancing a lopsided economy that is too dependent on investment and industry. Money is pouring into factories, and especially into priority industries such as electric vehicles, semiconductors and renewable-energy gear.
Without more forceful stimulus directed toward boosting spending instead of expanding supply, the risk, economists say, is that China will slip into a damaging period of falling prices and subdued growth similar to Japan’s decadeslong stagnation, or the painful debt workouts that followed past real-estate crises in Europe and the U.S.
“It seems like they’re just floundering,” said Katrina Ell, director of economic research for Asia-Pacific at Moody’s Analytics in Sydney. “I can’t see anything that brings me optimism.”
A run of downbeat data captures the anxiety: Consumer confidence sank in July while inflation remains pinned near zero. Business surveys in August recorded sinking profits and swelling inventories at Chinese manufacturers, telltale signs that factories are churning out goods far faster than China or even the world can scoop them up. Car sales fell in August for the fifth straight month. Yields on 10-year Chinese government bonds have plumbed new lows, indicating investors are souring on the economy’s prospects.
Saturday’s data showed retail sales rose just 2.1% year over year in August, slowing sharply from a 2.7% year-over-year rise the previous month. Industrial production rose 4.5%, down from 5.1% in July, while investment in buildings, equipment and other fixed assets slowed to 3.4% for the year through August, from 3.6% in the first seven months.
Home prices fell 5.7% year over year in August, data showed, the steepest decline in nine years, despite government efforts to stem the property crisis by lowering interest rates, relaxing home-purchase restrictions and pledging to buy unsold homes.
The only bright spot is exports, which rose 8.7% year over year in August, easily outpacing imports, which eked out growth of just 0.5%.
Many on Wall Street have taken an ax to their economic forecasts for China this year and next. Few now think Beijing’s target of around 5% growth for the year can be achieved without greater central bank and government aid. Mizuho Securities was the latest firm to join the downgrade parade, on Friday reducing its growth forecast to 4.7% this year from 4.8%, citing what it called a growing risk of delayed or insufficient policy responses to the mounting challenges.
Even leader Xi Jinping has toned down his expectations. In a speech Thursday, he urged Communist Party cadres to “work hard” to meet the government’s goal. As recently as July the instruction from the party’s top officials was to “unswervingly insist on achieving” that target.
Missing the official growth goal would be unusual, though the “around 5%” target gives Beijing some wriggle room, and economists broadly expect modest additional fiscal and monetary support in the remainder of the year to inch the economy over the line. A senior People’s Bank of China official hinted in a press briefing this month that the central bank is considering a cut to banks’ reserve requirements, freeing up more resources for lending. Officials have announced plans to buy up unsold homes and turn them into affordable rental housing.
But big-ticket stimulus is out. Beijing last month dismissed a large-scale property-sector rescue proposal from the International Monetary Fund as too expensive, unnecessary and likely to stir up financial trouble further down the road. Officials have stuck doggedly to their incremental approach to nudge the economy forward when it stumbles but not jolt it into higher growth, citing concerns over debt, exchange rates and financial stability. Revisions to social security, taxation and healthcare that would put households on a surer financial footing have been punted into the future.
The root of China’s problems is a still-festering property meltdown that is sapping government revenue, holding back investment and keeping consumers from spending more freely. Economists at Barclays estimate that if home prices nationwide fell in line with the 30% drop recorded in top cities since 2021, then China’s real-estate slump has cost the economy $18 trillion in vanished wealth—a staggering sum that adds up to around $60,000 for the average three-person household in China.
“There is a real crisis of consumer confidence in China,” Anthony Capuano, chief executive officer of hotel chain Marriott International said at a Bank of America conference in New York this month, according to a transcript of his remarks published by the company.
Beijing is trying to make up for the weakness at home by juicing factory output and exports, and reorienting investment away from real estate and toward advanced manufacturing and other high-tech sectors to forge a stronger and more self-sufficient economy.
But that strategy is meeting increasing pushback from trading partners alarmed at a rising tide of cheap Chinese goods. India this week said it would hit imports of some Chinese steel products with tariffs of 30%, the latest in a flurry of trade measures affecting China enacted by major emerging economies. Advanced economies including the U.S., the European Union and Canada are throwing up barriers to Chinese-made electric cars and channeling taxpayer dollars toward sensitive industries such as computer chips and renewable energy to shield them from the onslaught of Chinese competition.
Former President Donald Trump, the Republican presidential nominee, has said he would raise tariffs on Chinese imports to 60% if he wins the election in November, which would be a much tougher challenge for China’s economy than the trade war fought during his first administration. Vice President Kamala Harris, the Democratic nominee, is expected to mostly stick with the Biden administration’s focus on shielding specific sectors with tariffs and other restrictions, and limiting Chinese access to American technology.
For many economists, China’s most urgent challenge is deflation. A prolonged spell of falling prices makes debts harder to bear and tends to dissuade people from spending, in anticipation of a better deal in the future. Corporate profits and hiring suffer.
“I think right now they should focus on fighting deflationary pressure,” former People’s Bank of China Governor Yi Gang said last week at a panel discussion at the Bund Summit, a financial forum in Shanghai, referring to senior Chinese officials.
Consumer prices in China rose 0.6% in August, but strip out volatile items such as food and energy and the rise was just 0.3%—the lowest rate of core inflation in more than three years. Producer prices, the prices charged by companies for goods as they leave their factories, have been tumbling for almost two years. A broader measure of price changes across the whole economy has fallen in six of the past seven quarters.
Lower interest rates and higher government spending would help, economists say, but so too would measures to lift consumers out of their funk. Short-term support such as vouchers or handouts through e-payment apps might spur spending briefly, but a lasting fix would require the beginnings of recovery in the housing market, economists say.
“As long as households are this cautious, deflationary pressure will persist,” said Lynn Song, chief economist for Greater China at ING in Hong Kong.
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