China reported weaker-than-expected second-quarter gross domestic product (GDP) data and softer June economic data. Meanwhile, the country began the key policy meeting of the Third Plenum.
China published a series of disappointing economic data, which caused the fall of their stock markets on Monday. The benchmark Hang Seng Index fell more than 1% in the first hour of trading, following last week’s strong rally. Investors are concerned about China’s economic outlook amid weak domestic demand, a property crisis and escalating geopolitical tensions.
In addition, the country has begun its political meeting, the Third Plenum, in which reforms are expected to be introduced. policies aimed at addressing the challenges of growth of the world’s second-largest economy. Key policies may include public finances, tax reform, technological advancement and foreign investment.
China’s economic recovery is faltering
According to China’s National Bureau of Statistics, its GDP grew by 4.7% in the second quarter, at an annualized pace, much weaker than the 5.1% estimated, and below the 5.3% of the first quarter. This raises doubts about whether the country can achieve its goal growth rate of 5% set for 2024, making the Third Plenum of the Communist Party, which takes place from Monday to Thursday, a critical event for global markets.
In addition, the real estate market, with long-standing problemscontinued to come under pressure, with new home prices falling 4.5% in June from a year earlier, marking the lowest level since June 2015. This decline was sharper than the 3.9% decline seen in the previous month, and represents the steepest drop in nine years.
In addition, China’s retail sales rose 2% year-on-year in June, below the expected increase of 3.3%, and down from the 3.7% recorded in May. On the positive side, the Industrial production increased in June 5.3% from a year earlier, above the 5.1% forecast but slowing from 5.6% in May. Fixed-asset investment in China rose 3.9% in the first half, slightly below the 4% growth in the previous month.
China has been experiencing slowing economic growth since 2021, when the country implemented strict restrictions due to the COVID-19 pandemic. The post-coronavirus recovery has been seen as faltering, with weak consumer demand contributing to the deflationary pressures between August 2023 and earlier this year, along with escalating tensions between the United States and China, and the ongoing housing crisis.
However, the Chinese government faces a dilemma in addressing these growth challenges, weighing the risks of overstimulating the economy. The People’s Bank of China allowed the refinancing of part of its medium-term lending facility, a measure that would have financial tool to manage liquidity and guiding interest rates in the financial system, withdrawing 3 billion yuan of cash, around 380 million euros, for the fifth consecutive month. As expected, the bank kept the lending rate on the 1-year medium-term lending facility unchanged at 2.5%. The central bank’s caution suggests that China intends to support the economy with limited stimulus measures, while avoiding the creation of bubbles and a further devaluation of the Chinese yuan.
Chinese policymakers meet for Third Plenum
Following the release of the GDP, China is set to begin the Third Plenum, which is considered a crucial political event in shaping the country’s economic outlook. The Third Plenum of the Central Committee of the Communist Party of China is held every five years and is a crucial event in which decisions are made and Important political directions and reforms are decidedHistorically, the Third Plenum has been a turning point for China’s economic and political strategies. For example, the 1978 Third Plenum marked the beginning of China’s “Reform and Opening” policy under the leadership of Deng Xiaoping, catalyzing the country’s economic transformation. Similarly, the 2013 meeting introduced a broad reform program covering the economy, governance, social policies and the legal system.
During this upcoming meeting, China is expected to continue to advance economic reforms, moving from reliance on land sales to technological advancements. Economists predict that China will unveils measures to address housing sector declinefiscal relations between the central and local governments and priorities in technological development. Possible reforms could include the introduction of a consumption tax to boost public revenues and adjustments in retirement age policies to cope with the rapid ageing of the population. In addition, measures to improve foreign investment opportunities in order to stimulate capital inflows could be discussed.
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