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.

Also Read:Explained | On China’s economic slowdown

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.”

In this photo released on July 18, 2024, by Xinhua News Agency Chinese President Xi Jinping speaks at the third plenary session of the 20th Communist Party of China (CPC) Central Committee held from July 15 to 18 in Beijing. China’s ruling Communist Party wrapped up a top-level meeting by endorsing policies aimed at advancing the country’s technological power and fortifying its national security.
| Photo Credit: AP

Beijing’s leaders vowed on July 18 to resolve “risks” plaguing China’s economy, but were yet to offer any concrete steps to pull the country out of its financial woes.

The world’s second-largest economy is grappling with a property debt crisis, weakening consumption, and an ageing population.

All eyes were on how this week’s Third Plenum meeting of the Communist Party in Beijing, attended by President Xi Jinping, might tackle that deepening economic malaise.

But few new policies were announced as the meeting wrapped up Thursday.

State news agency Xinhua said they had agreed to “prevent and resolve risks in key areas such as real estate, (and) local government debt”.

They also vowed to “actively expand domestic demand”, state media reported, after data this week showed retail sales — a key gauge of consumption — rose just 2% in June.

Gary Ng, a senior economist at Natixis, said the readout offered “nothing out of expectation as it just confirms existing policies.”

‘Market failures’

But Hoo Tiang Boon at Nanyang Technological University in Singapore told AFP the statement “acknowledges certain risks and obstacles to the Chinese economy”.

“It’s a sign that Beijing recognises the problems, but I’m not sure if they know what are the effective measures to address them,” he said.

The Third Plenum has for decades been an occasion for the party’s top leadership to unveil major economic policy shifts.

In 1978, then-leader Deng Xiaoping used the meeting to announce market reforms that would put China on the path to dazzling economic growth by opening it to the world.

And more recently following the closed-door meeting in 2013, the leadership pledged to give the free market a “decisive” role in resource allocation, as well as other sweeping changes to economic and social policy.

Echoing past plena, top officials promised Thursday to “give fuller play to the role of market mechanisms”.

But they also said they would “make up for market failures” and “smooth the circulation of the national economy”.

‘Positive signals’, but few specifics

Lynn Song, ING’s Chief Economist for Greater China, told AFP the readout offered some “positive signals”.

But, he said, the meeting was “not a platform for pushing specific new stimulus measures”.

“Those who were looking for new signals on the property market will likely be disappointed,” Song said.

“While real estate was mentioned as one of the three key risks China prioritises resolving, there was no further mention of expanding affordable housing nor further specifics on efforts to stabilise the property market,” he pointed out.

The meeting comes just days after China posted official statistics showing the economy grew by just 4.7% in the second quarter of the year.

It represented the slowest rate of expansion since early 2023, when China was emerging from a crippling zero-COVID policy that strangled growth.

Analysts polled by Bloomberg had expected 5.1%.

Beijing has said it is aiming for 5% growth this year — enviable for many Western countries but a far cry from the double-digit expansion that for years drove the Chinese economy.

The economic uncertainty is also fuelling a vicious cycle that has kept consumption stubbornly low.

Among the most urgent issues facing the economy is the beleaguered property sector, which long served as a key engine for growth but is now mired in debt, with several top firms facing liquidation.

With the country facing those headwinds, this week’s meeting resolved to “strengthen guidance of public opinion and effectively prevent and resolve ideological risks”, according to state media.

Officials also formally removed ex-foreign minister Qin Gang from the ruling Communist Party’s highest decision-making body, and “confirmed” the party’s move to expel former defence minister Li Shangfu.

Both officials disappeared from the public eye last year after just a few months on the job.

Workers labor in a factory of automotive aluminium wheel hubs in Binzhou city in east China’s Shandong province on May 27, 2024.

China’s manufacturing activity unexpectedly fell in May, keeping alive calls for fresh stimulus as a protracted property crisis in the world’s second-largest economy continues to weigh on business, consumer and investor confidence.

The official manufacturing purchasing managers’ index (PMI) dropped to 49.5 in May from 50.4 in April, the National Bureau of Statistics (NBS) said on Friday, below the 50-mark separating growth from contraction and missing analysts’ forecast of 50.4.

The disappointing number adds to a series of recent indicators showing the $18.6 trillion economy is struggling to get back on its feet, eroding earlier optimism seen after better-than-expected output and trade data.

“I think the data particularly reflects soft domestic demand, the housing sector continued to worsen and retail sales were not strong,” said Xu Tianchen, senior economist at the Economist Intelligence Unit. “The May reading may indicate a temporary blip. We’ll probably see an improvement in June as new government policies start to impact, such as the property rescue plan and the issuance of special sovereign bonds,” he added.

The PMI’s sub-indices for new orders and new export orders both tipped back into contraction after 2 months of growth, while employment continued to shrink.

Cautious approach: Banks are reluctant to lend to housing projects fearing more bad loans. File
| Photo Credit: Reuters

When China’s local governments began compiling a “whitelist” of housing projects for loans earlier this year, troubled developers hoped it would open a spigot of credit for a sector that remains a major stumbling block to a broad economic revival.

Four months later, new funding is only coming by the drip, reflecting the deep-seated caution about the outlook for China’s residential property market, according to Reuters interviews with bankers and developers.

Banks have been reluctant to heed Beijing’s repeated nudges to bolster credit to the embattled sector given the risks of more bad loans, further undermining confidence in the crisis-hit property market seen as crucial to shoring up a shaky economy.

New loans were only approved since late March, according to the sources, which surprised companies and investors who had expected fresh lending for developers at the start of the ‘whitelist’ programme months earlier.

The main hurdle to granting more new bank loans is the current weak property market conditions, said Lawrence Lu, managing director at S&P Global Ratings.

“Developers need to have a project in place to get funding … the issue now is whether the project can generate sufficient cash flow to repay the debt,” he said.

At least six defaulted private developers received bank approvals for new loans for “whitelist” projects since late March, according to one company statement, senior executives of two developers and two other people with knowledge of the program.

Those new loans were granted for fewer than a handful of projects and lending received so far was equivalent to hundreds of thousands of dollars per project, three of the people told Reuters.

That’s just a drop in the ocean given the vast stock of unfinished housing—a Reuters report in March estimated that the “whitelist” programme covers projects that need fresh financing of 1.5 trillion yuan.

The loans are only granted depending on the progress of construction, the three sources said, adding the volume of approval was “insignificant” given the huge number of uncompleted homes.

Frozen projects

The slow roll-out of the “whitelist” lending reflects the challenge facing Beijing which has pushed banks to speed up approvals of new loans to cash-starved private developers to complete their projects.

Under the “whitelist” mechanism launched in January, local governments nominate projects and state-owned as well as commercial banks are encouraged to provide lending. By March-end, banks had approved the equivalent of $72 billion in loans for 2,100 housing projects, state media reported.

Developers and bankers said many of these approvals restarted existing loans, rather than providing new credit.

Estimates vary widely, but analysts agree there are tens of millions of uncompleted apartments across China after a building boom turned to bust with the failure of developers. There is no public data available on the scale and terms of lending under the “whitelist” policy.

‘A bad deal’?

One of the six private developers whose projects got bank approval said it had decided to refuse the help.

“We think it’s a bad deal because financing incurs interest,” a senior executive at the developer told Reuters. “Once we use the ‘whitelist’ loans we have to complete the construction. However, we’re not able to sell all of the units under this bad market so it’s only increasing costs for us.”

Some bankers said they would continue to push back on the “whitelist” directive by negotiating with officials and explaining the shortcomings in projects.

The young Chinese man looked lost and exhausted when Border Patrol agents left him at a transit station. Deng Guangsen, 28, had spent the last two months traveling to San Diego from the southern Chinese province of Guangdong, through seven countries on plane, bus and foot, including traversing Panama’s dangerous Darién Gap jungle.

“I feel nothing,” Mr. Deng said in the San Diego parking lot, insisting on using the broken English he learned from the Harry Potter film series. “I have no brother, no sister. I have nobody.”

Mr. Deng is part of a major influx of Chinese migration to the U.S. on a relatively new and perilous route that has become increasingly popular with the help of social media. Chinese people were the fourth-highest nationality, after Venezuelans, Ecuadorians and Haitians, crossing the Darién Gap during the first nine months of this year, according to Panamanian immigration authorities.

Chinese asylum-seekers, as well as observers, say they are seeking to escape an increasingly repressive political climate and bleak economic prospects.

They also reflect a broader presence of migrants at the U.S.-Mexico border — Asians, South Americans and Africans — who made September the second-highest month of illegal crossings and the U.S. government’s 2023 budget year the second-highest on record.

The pandemic and China’s COVID-19 policies, which included tight border controls, temporarily stemmed the exodus that rose dramatically in 2018 when President Xi Jinping amended the constitution to scrap the presidential term limit. Now emigration has resumed, with China’s economy struggling to rebound and youth unemployment high. The United Nations has projected China will lose 3,10,000 people through emigration this year, compared with 1,20,000 in 2012.

It has become known as runxue, or the study of running away. The term started as a way to get around censorship, using a Chinese character whose pronunciation spells like the English word “run” but means “moistening.”

‘Reflecting despair’

“This wave of emigration reflects despair toward China,” Cai Xia, editor-in-chief of the online commentary site of Yibao and a former professor at the Central Party School of the Chinese Communist Party in Beijing.

“They’ve lost hope for the future of the country,” said Ms. Cai, who now lives in the U.S. “You see among them the educated and the uneducated, white-collar workers, as well as small business owners, and those from well-off families.”

Those who can’t get a visa are finding other ways to flee the world’s most populous nation. Many are showing up at the U.S.-Mexico border to seek asylum. The Border Patrol made 22,187 arrests of Chinese for crossing the border illegally from Mexico from January through September, nearly 13 times the same period in 2022. Arrests peaked at 4,010 in September, up 70% from August. The vast majority were single adults.

The popular route to the U.S. is through Ecuador, which has no visa requirements for Chinese nationals. Migrants from China join Latin Americans there to trek north through the once-impenetrable Darién and across several Central American countries before reaching the U.S. border. The journey is well-known, and has its own name in Chinese: zouxian or walk the line.

The monthly number of Chinese migrants crossing the Darién has been rising gradually, from 913 in January to 2,588 in September. For the first nine months of this year, Panamanian immigration authorities registered 15,567 Chinese citizens crossing the Darién. By comparison, 2,005 Chinese people trekked through the rainforest in 2022, and just 376 in total from 2010 to 2021.

Short video platforms and messaging apps provide not only on-the-ground video clips but also step-by-step guides from China to the U.S., including tips on what to pack, where to find guides, how to survive the jungle, which hotels to stay at, how much to bribe police in different countries and what to do when encountering U.S. immigration officers.

Translation apps allow migrants to navigate through Central America on their own, even if they don’t speak Spanish or English. The journey can cost thousands to tens of thousands of dollars, paid for with family savings or even online loans.

It’s markedly different from the days when Chinese nationals paid smugglers, known as snakeheads, and traveled in groups.

Search for a way in

Migrants hoping to enter the U.S. at San Diego wait for agents to pick them up in an area between two border walls or in remote mountains east of the city covered with shrubs and large boulders.

Many migrants are released with court dates in cities nearest their final destination in a bottlenecked system that takes years to decide cases. Chinese migrants had an asylum grant rate of 33% in the 2022 budget year, compared with 46% for all nationalities, according to Syracuse University’s Transactional Records Access Clearing house.

Catholic Charities of San Diego uses hotels to provide shelters for migrants, including 1,223 from China in September. The average shelter stay is a day and a half among all nationalities. For Chinese visitors, it’s less than a day.

In September, 98% of U.S. border arrests of Chinese people occurred in the San Diego area.

In recent weeks, Chinese migrants have filled makeshift encampments in the California desert as they wait to turn themselves in to U.S. authorities to make asylum claims.

The World Bank has said that east Asia’s developing economies are expected to expand at one of the lowest rates in five decades, blaming the gloomy outlook to slowdown in China. The Financial Times said in a report that the World Bank cut its forecast for China’s growth next year to 4.4 per cent from the 4.8 per cent it expected in April. This is even less than the growth forecast of five per cent released by China’s policy makers.

The World Bank cited a string of weak indicators for the dismal forecast for the world’s second-biggest economy, said the Financial Times (FT) report.

The bank also downgraded its 2024 forecast for gross domestic product growth for developing economies in east Asia and the Pacific to 4.5 per cent from 4.8 per cent in the first quarter of the current financial year, the outlet further said.

This is the slowest rate of growth for one of the high performing regions of the world, except the coronavirus pandemic, the Asian financial crisis and the global oil shock in the 1970s.

“China’s rebound from strict pandemic controls was expected to be more sustained and more significant than it turned out to be,” Aaditya Mattoo, World Bank chief economist for east Asia and the Pacific, told FT.

The reasons attributed are Chinese retail sales tumbling to below pre-pandemic levels, stagnant house prices, increased household debt and lagging private sector investment.

Mr Mattoo said in order to put China on the expected growth track, “deeper” service sector reforms are needed.

“In a region which has really thrived through trade and investment in manufacturing… the next big key to growth will come from reforming the services sectors to harness the digital revolution,” he added.

Compared to second quarter of 2022, goods exports are down more than 20 per cent in Indonesia and Malaysia, and more than 10 per cent in China, said the FT report.

Rising household, corporate and government debt has further dented growth prospects, it added.

Another major reason is the trade tensions between China and the US. For years, Beijing was benefited by the tariffs it imposed on Washington that drove demand for imports towards other countries in the region, especially Vietnam.

But the introduction of the IRA and new chip rules in 2022 turned the tide in the favour of the US. They have hit south-east Asian countries as their exports of affected products to the US have fallen.

Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are “increasingly in trouble” because of their materialism and “spiritual poverty.” File
| Photo Credit: AP

China’s economy, the world’s second-largest, is now in deep distress and its successful model of growth for 40 years stands “broken”, a prominent American financial publication has said, noting that signs of trouble extend beyond China’s dismal economic data to distant provinces.

TheWall Street Journal in a major Sunday story wrote that economists now believe China is entering an era of much slower growth, made worse by unfavourable demographics and a widening divide with the U.S. and its allies, which is jeopardising foreign investment and trade.

Also Read | China’s Xi calls for patience as Communist Party tries to reverse economic slump

Rather than just a period of economic weakness, this could be the dimming of a long era, it commented.

“Now the (economic) model is broken,” the financial daily said.

“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” Adam Tooze, a Columbia University history professor who specialises in economic crises, was quoted as saying by The Wall Street Journal.

According to the report, the total debt, including that held by various levels of government and state-owned companies, climbed to nearly 300% of China’s GDP as of 2022, surpassing U.S. levels and up from less than 200% in 2012, according to Bank for International Settlements data.

In Beijing’s corridors of power, senior officials have recognised that the growth model of past decades has reached its limits, the daily wrote.

In a blunt speech to a new generation of party leaders last year, Chinese President Xi Jinping took aim at officials for relying on borrowing for construction to expand economic activities, it added.

“Some people believe that development means investing in projects and scaling up investments,” Mr. Xi said, warning: “You can’t walk the old path with new shoes.” Mr. Xi and his team so far have done little to shift away from the country’s old growth model, the financial daily wrote.

China’s gross domestic product (GDP) grew 5.5% year-on-year in the first half (H1) of 2023, the country’s National Bureau of Statistics (NBS) said in June.

China’s GDP reached 59.3 trillion yuan (about 8.3 trillion U.S. dollars) in the first half, according to the NBS data. In the second quarter, the country’s GDP expanded 6.3% year on year, China’s official media quoted the NBS as saying.

Meanwhile, China on Monday also trimmed for the second time this year its one-year loan prime rate (LPR) by 10 basis points from 3.55% to 3.45% and did not change the five-year rate, which stands at 4.20%, to revive economic growth in the world’s second-largest economy after that of the United States.