A view of tall buildings along the Suzhou Creek is seen on July 5, 2023 in Shanghai, China.

Ying Tang | NurPhoto | Getty Images

The Chinese economy may face prolonged low growth, a prospect that could have global implications after 45 years of rapid expansion and globalization.

The Chinese government is taking several measures whose aim is to boost the economy with leaders Monday pledged to “adjust and adapt policies in a timely manner” While pushing for stable employment a strategic goal for its distressed property sector. The Politburo also announced a pledge to boost domestic consumption demand and address local credit risks.

Beijing announced on Monday that Chinese gross domestic product grew 6.3% year-on-year in the second quarter, marking an expansion of 7.3% after the world’s second-largest economy emerged from strict COVID-19 lockdown measures. is lower than expected.

On a quarterly basis, economic output grew by 0.8%, slower than the 2.2% quarterly growth recorded in the first three months of the year. Meanwhile, youth unemployment hit a record high of 21.3% in June. On a slightly more positive side, the pace of industrial production growth picked up year-on-year from 3.5% in May to 4.4% in June, well above expectations.

The ruling Chinese Communist Party has set a growth target of 5% for 2023, which is below normal and especially modest for a country that has averaged 9% annual GDP growth since opening its economy in 1978. registered an increase.

Over the past few weeks, officials announced a series of pledges targeted at specific sectors or designed to reassure private and foreign investors of a more favorable investment climate on the horizon.

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However, these were largely broad measures that lacked some key details, and the latest readout of the Politburo’s quarterly meeting on economic affairs had a softer tone but fell short of major new announcements.

Julian Evans-Pritchard, head of China economics at Capital Economics, said in a note on Monday that the country’s leadership is “clearly concerned”.Readout described the economic trajectory as “disturbing”. and highlighted the “numerous challenges facing the economy”.

These include domestic demand, financial difficulties in key sectors such as assets and a gloomy external environment. Evans-Pritchard said “risks” were mentioned seven times in the latest readout, compared to three times in the April readout, and it appears leadership’s priority is to expand domestic demand.

“All told, the Politburo meeting took a soft stance and made it clear that the leadership felt more work needed to be done to get reform back on track. Policy support will be rolled out,” Evans-Pritchard said.

“But the absence of any major announcement or policy specifics suggests a lack of urgency or that policy makers are struggling to come up with suitable measures to boost growth. Not particularly reassuring.”

triple blow

Chinese economy still suffering from “triple shock” COVID-19 and prolonged lockdown measuresits sick property area and a flurry of regulatory changes That is linked to President Xi Jinping’s “shared prosperity” vision, according to Rory Green, head of China and Asia research at TS Lombard.

As China is still within a year of reopening after zero-Covid measures, much of the current weakness can still be attributed to that cycle, Green suggested, but added that these are appropriate policy responses. Can be strong without

“There is a possibility that if Beijing does not intervene, the cyclical part of the Covid cycle damage may align with some of China’s structural constraints – particularly around the size of the asset sector, isolation from the global economy, demographics – And push China into much slower growth,” he told CNBC on Friday.

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TS Lombard’s base case is for the Chinese economy to stabilize in late 2023, but the economy is entering a long-term structural recession, albeit not yet a Japan-style “stagflation” scenario, and is expected to average closer to 4%. These structural constraints are likely to dampen annual GDP growth.

Although investment in China will still be essential for international companies as it remains the world’s largest consumer market, Green said the slowdown could make it “a little less attractive” and “catch up with the West” in terms of investment flows. may accelerate separation. and manufacturing.

However, for the global economy, the most immediate impact of the Chinese slowdown will come in the commodities and industrial cycle, as China is reconfiguring its economy to reduce its reliance on the property sector which “absorbs and drives commodity prices”. ” doing.

“Those days are gone. China is still going to invest a lot, but it will be in more advanced manufacturing, technical hardware, like electric vehicles, solar panels, robotics, semiconductors, those kinds of areas,” Green said.

“The asset driver – and with it, the pool of iron ore from Brazil and/or Australia and machines from Germany or equipment from around the world – is gone, and China will be a much less important factor in the global industrial cycle.”

second order effect

The re-calibration of the economy away from assets and towards more advanced manufacturing is evident in China’s massive push into electric vehicles, which has pushed the country Japan was overtaken earlier this year As the world’s largest auto exporter.

“This shift from a complementary economy, where Beijing and Berlin benefit from each other, to now being competitive is another major consequence of the structural recession,” Green said.

He said that in addition to the immediate reduction in demand for goods, China’s response to its changing economic situation would also have “second-order effects” on the global economy.

“China is still making a lot of stuff, and they can’t consume it at home. A lot of the stuff they’re making now is of very high quality and will continue to be, especially when real estate is low. Money is going in, and trillions of renminbi are going into these advanced tech sectors,” Green said.

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“And so the second-order effect, it’s not only less demand for iron ore, but also a lot more global competition across a range of advanced manufactured goods.”

While it is not yet clear how Chinese households, the private sector and state-owned enterprises will handle the transition from an asset- and investment-driven model to one driven by advanced manufacturing, Green said the country is currently at a “critical point”. Is. ,

He added, “The political economy is changing, partly due to design, but also partly due to the fact that the property sector is effectively dead or dying, so they have to change and a new development model can be found.” emerging.”

“It’s not just going to be a slower version of China that we had before Covid. It’s going to be a new version of the Chinese economy, which will also be slower, but it’s going to be one with new drivers and new kinds of characteristics.” ..”


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