EDITORIAL: China’s economic uncertainty

China’s economy in the second quarter of this year grew by a weaker-than-expected 4.3 percent compared with a year earlier, data released on Wednesday last week by the Chinese National Bureau of Statistics showed. It weakened from a 5 percent increase in the previous quarter and fell short of the average market consensus of an expectation of 4.5 percent. It was also the slowest expansion since the fourth quarter of 2022.

Overall, China’s economy in the first half of this year expanded 4.7 percent year-on-year, the data showed. To meet the bottom of Beijing’s official growth target of 4.5 to 5 percent this year, the economy needs to expand at least 4.3 percent in the second half of the year. However, an imbalance in China’s economy is becoming increasingly clear: Exports remain strong, but weak domestic demand and investment continue to drag on growth.

Major global investment banks, including Morgan Stanley, Goldman Sachs Group Inc, ING Groep NV and Australia and New Zealand Banking Group Ltd, adjusted downward their full-year growth forecasts following last week’s data, expecting China’s economy to expand 4.5 to 4.6 percent this year. While the downgrade suggests urgency for Beijing to step up stimulus to achieve its annual growth target, a large-scale stimulus package appears unlikely, as Chinese policymakers have shown little intent to do so.

Attention is turning to the Chinese Communist Party Politburo meeting later this month as observers expect policymakers to review economic performance in the first half of this year and outline policy priorities for the second half. It remains to be seen whether any selective and targeted measures to bolster consumption and investment would be implemented.

The world’s second-largest economy has for years relied heavily on state-supported, high-tech manufacturing, such as electric vehicles, robotics and semiconductors, but downturns in the broader, job-creating service and traditional industries have worsened. While exports soared to record highs in the past few months, that strong performance masks weakness in domestic demand and has yet to trickle down to the broader economy; it is also starting to trigger frictions with trading partners.

Most economists have termed the growing contrast between the strong and weak sectors in China’s economy a phenomenon of polarization. Li Daokui (李稻葵), a Tsinghua University economist and government adviser, thinks otherwise. At an online forum on July 11, he said China’s economy faces a three-year cooling, rather than a “K-shaped” divergence. He also highlighted hidden unemployment, slumping fixed-asset investment and mounting local government debt as structural weaknesses behind the economy’s overall cooling.

Li estimated that China’s broad unemployment rate is 10.2 percent, about double the official figure. He warned of a hidden unemployment crisis involving 24 million long-term unemployed people. Of them, 13 million are young people aged 16 to 24. The emerging high-tech manufacturing sector could not easily absorb job losses in the real-estate, construction and service sectors, he said.

Li said local governments are preoccupied with repaying old debts rather than investing in productivity or infrastructure to create jobs. However, he was most alarmed by the unprecedented weakness in China’s fixed-asset investment, which contracted 3.8 percent last year — the first decline since 1996 — and has continued to fall this year. Official data released on Wednesday last week showed fixed-asset investment dropped 5.7 percent year-on-year in the first half, with infrastructure investment down 2.4 percent, real-estate investment 18 percent, public construction investment 2.3 percent and private investment 8.5 percent. Despite resilient high-tech manufacturing, factory output and AI-related exports, domestic investment remained weak as the prolonged property downturn weighed heavily.

In short, China faces structural problems in its economy. On the one hand, exports remain strong, but competition is intensifying and profit margins for exporters are dwindling.

On the other, there have been impressive advancements in emerging technologies, but their proportion of the economy remains small and they result in a limited increase in jobs.

To achieve its growth target, China needs to boost external trade as the recovery of domestic demand remains slow. However, as Hung Yao-nan (洪耀南), deputy director of Tamkang University’s Institute of China Studies, has observed, the more China relies on exports, the more urgent it becomes to be cost-competitive, and the more difficult it is to keep profit margins and increase household income, thereby further slowing the recovery of domestic demand. That is a dilemma in its industrial and economic transformation, and it would take years to fix if its growth model remains export-oriented.

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