China’s factory output growth slowed and missed expectations in July. File
| Photo Credit: Reuters

China’s factory output growth slowed and missed expectations in July, adding to a series of indicators that show the world’s second-largest economy is struggling to kick into a higher gear, even with recent government support.

Industrial output grew 5.1% from a year earlier, National Bureau of Statistics (NBS) data showed, slowing from the 5.3% pace in June and below expectations for a 5.2% increase in a Reuters poll of analysts.

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In an upbeat contrast, the NBS’ monthly activity indicators showed retail sales, a gauge of consumption, rose 2.7% in July, quickening from a 2.0% increase in June and beating expectations for growth of 2.6%, a sign efforts to boost household spending were getting some traction.

However, analysts warn the broader outlook is still highly challenging for policymakers, suggesting more stimulus measures will be needed.

“The data shows that the economy has gotten off to a weak start in the second half of the year, and it is expected that the probability of replacing MLF with a RRR cut will increase, but key to maintaining 5% economic growth remains the arrival of fiscal spending,” said ANZ China market economist Xing Zhaopeng. He was referring to the People’s Bank of China’s medium-term lending facility and reserve requirement ratio.

On Thursday (August 15, 2024), the central bank injected cash through a short-term bond instrument and said it would conduct an MLF rollover later this month as it extends liquidity support to the financial system.

Chinese leaders last month signalled that they would give greater consideration to suggestions they turn to a new playbook and focus growth boosting efforts at consumers, rather than more funnelling more funds into infrastructure and manufacturing.

Calls for more growth boosting measures for the $19 trillion economy have dogged officials ever since a widely expected post-pandemic recovery failed to materialise in 2022.

While the government is still targetting growth of around 5% this year, analysts consider it increasingly likely that the world’s production powerhouse has entered a prolonged economic malaise similar to Japan in the 1990s.

Fixed asset investment expanded 3.6% in the first seven months of 2024 year-on-year, but also missed expectations for a 3.9% rise and also slowed from the 3.9% growth in the January to June period.

China’s central bank at a meeting earlier this month said it would step up financial support to the broader economy and efforts would be directed more at consumers to spur consumption.

But with domestic demand so weak and the outlook unclear, households and businesses are in no rush to borrow.

A statement issued after the meeting of Polit Bureau of China’s ruling Communist Party said coming months would be tough.
| Photo Credit: AP

China’s powerful Polit Bureau (PB) has endorsed the ruling Communist Party’s long-term strategy for growing the economy by encouraging more consumer spending and weeding out unproductive companies to promote “survival of the fittest.”

A statement issued on July 30 after the meeting of the 24 highest leaders of the party warned that coming months would be tough, perhaps alluding to mounting global uncertainties ahead of the U.S. Presidential election in November.

“There are still many risks and hidden dangers in key areas,” it said, adding that the tasks for reform and stability in the second half of the year were “very heavy.”

The PB promised unspecified measures to restore confidence in financial markets and boost government spending, echoing priorities laid out by a wider meeting of senior party members earlier in July. After that gathering, China’s central bank reduced several key interest rates and the government doubled subsidies for electric vehicles bought to replace older cars as part of the effort to spur growth.

The PB’s calls to look after low- and middle-income groups reflect pledges to build a stronger social safety net to enable families to spend more instead of socking money away to provide for health care, education and elder care. But it provided no specifics on how it will do that.

“This sounds promising on paper. But the lack of any specifics means it is unclear what it will entail in practice,” Julian Evans-Pritchard of Capital Economics said in a commentary. The party’s plans for how to improve China’s fiscal policies at a time of burgeoning local government debt were “short on new ideas,” he said.

Instead, the emphasis is on moving faster to implement policies such as the government’s campaign to convince families to trade in old cars and appliances and redecorate their homes that includes tax incentives and subsidies for purchases that align with improved efficiency and reducing use of polluting fossil fuels.

Under President Xi Jinping, China has prioritised developing industries using advanced technologies, a strategy that has made the country a leader in some areas but also led to oversupplies that are now squeezing some manufacturers, such as makers of solar panels.

‘Vicious competition’

The statement vowed support for “gazelle enterprises and unicorn enterprises,” referring to new, fast-growing companies and high-tech start-ups. It warned against “vicious competition” but also said China should improve mechanisms to ensure “survival of the fittest” and eliminate “backward and inefficient production capacity.”

The document also highlighted longstanding concerns. The countryside and farmers need more support to “ensure that the rural population does not return to poverty on a large scale,” it said. It also condemned what analysts have said is widespread resistance to fresh initiatives, saying that “formalism and bureaucracy are stubborn diseases and must be corrected” and warning that economic disputes should not be resolved by “administrative and criminal means.”