Growth momentum slowed in Q2, but 5% growth still achievable

July 30, 2024

Trusted Insights for What’s Ahead™

• Status of China’s Economy: Growth moderated in Q2, but more government support is likely coming
  After an above-expectations y-o-y growth of 5.3% in Q1, economic growth slowed to 4.7% in Q2. This was largely due to weak domestic demand, itself a reflection of the negative impact that China’s structural challenges – especially the downturn of the property sector – are having on the private sector and consumer confidence. In the face of these downside risks, the country’s top leadership signaled their intention at the recently concluded third plenary session of the 20th Central Committee of the CPC (aka. “Third Plenum”), to intensify fiscal support and monetary easing as necessary to achieve the official 2024 growth target of “around 5%”. With growth at 5.0% in H1, and given our expectations for increasing government support in H2, we maintain our 2024 growth forecast at 5.0%.
• Investment Trends: Manufacturing remains robust, while infrastructure investment declines and property investment contracts
  Fixed asset investment (FAI) declined to 3.9% y-o-y in H1, down from 4.0% in Jan-May, driven by a slowdown in infrastructure investment and the ongoing contraction of property investment. Manufacturing investment remained robust. Looking forward, infrastructure and manufacturing investment will likely accelerate as more of the RMB 1 trillion earmarked in ultra-long special treasury bonds for this year are issued.
• Consumption Trends: Fading pent-up demand leaves a modest outlook for consumption
  Growth in retail sales slowed to 2.0% y-o-y in June, down from 3.7% in May. Clearly, the pent-up demand that was released over the May Day holiday and the annual 618 online shopping festival was short-lived, a further indication of the overall weakness in consumer confidence levels. To make matters worse, household income growth moderated in Q2, likely driven by the ongoing weakness in the labor market, which we expect to further constrain consumer spending.
• Trade Trends: Chinese export growth is benefitting from the front-loading of orders in US and EU ahead of tariffs
  Export growth accelerated from 7.6% in May to 8.6% y-o-y in June. This was driven not only by a low base of comparison but also because importers in the US and the EU are front-loading orders ahead of tariffs. The front-loading of orders will likely continue driving export growth over the coming months. But this likely portends a worsening outlook for Chinese exports in the future.
• Implications for Business 
  The Chinese economy is likely to achieve its official growth target of “around 5%” in 2024 thanks to supply side stimulus, and the periodic releases of pent-up demand during holidays and online shopping festivals which gives a boost to the consumption side. However, unless the structural imbalances that are weighing on growth are addressed, the market will continue being characterized by weak spending and price-based competition leading to downward pressures on profits.

  The recently concluded Third Plenum outlined a series of measures to address the structural flaws that underpin the ongoing weakness in private consumption, such as strengthening the social safety net, improving income distribution, developing a new real estate development model, and increasing the fiscal capacity of local governments to enable them to play a more significant role in improving people's livelihoods. Details on implementation are still forthcoming, with the task-specific Politburo meeting this month expected to provide more information on this.

  In the meantime, the top priority remains strengthening the resilience of the Chinese economic and governance systems against domestic and external volatility. This explains the emphasis the Third Plenum placed on achieving technological self-reliance by fostering the development of 'new productive forces.' This includes improving the country’s indigenous innovation capabilities in core and emerging technologies, by securing key industrial chains in industries such as integrated circuits, medical devices and advanced materials, and by strengthening state-owned enterprises (SOEs), which according to the Third Plenum’s Resolution are to be “steered toward major industries and key fields that are vital to national security and serve as the lifeblood of the national economy.”

  It is also worth noting that the CPC has set a 2029 deadline to accomplish the reforms outlined at the Third Plenum. This is a very ambitious target, especially given the complexity of the structural imbalances China is facing.