China’s Economic Update: Weak Confidence Continues to Impact Growth

China’s Economic Growth Faces Challenges Amid Weak Confidence

By Lynn Song

China’s economic growth continues to face challenges as weak confidence persists among both the private sector and households. Recent data releases have shown that most indicators came in weaker than market forecasts, painting a mixed picture for the country’s economic outlook.

One key theme for the month was the cautious approach taken by both the private sector and consumers. Credit data revealed that aggregate financing declined for the first time since 2005, with M2 growth also hitting record lows. This contraction in credit, following a strong 2023, suggests that real interest rates may be too high for the current state of the economy, leading to speculation about potential monetary easing in the coming months.

Retail sales also reflected consumer caution, dropping to a new post-pandemic low of 2.3% year-on-year. Consumers have been holding back on big-ticket purchases in favor of spending on essentials like food, beverages, and entertainment.

Fixed asset investment disappointed as well, falling to 4.2% year-on-year year-to-date, largely due to a lackluster performance in private sector investment. Real estate investment remained a major drag on overall investment, with property prices declining sharply in April and developer sentiment hitting new lows.

Despite these challenges, there is a silver lining in China’s transition towards high-tech development. Industrial activity showed signs of recovery, with industrial production rising to 6.7% year-on-year in April, driven by growth in high-tech manufacturing, electronics, and automotive sectors. Imports also exceeded expectations, fueled by demand for AI-related products.

Policy measures have been rolled out to support growth stabilization, particularly in the property market. The central government initiated a RMB1 trillion ultra-long-term bond issuance and introduced measures such as removing mortgage rate floors and reducing downpayment ratios to stimulate housing demand.

Overall, China’s economic growth remains unbalanced, with challenges in certain sectors offset by pockets of strength in high-tech industries. The upcoming Third Plenum meeting in July is expected to provide further details on the government’s long-term policy direction, with a focus on reforms and modernization efforts to support growth and stability in the economy.