China’s Waning Economic Recovery Spurs Calls for Stimulus

·5 min read

(Bloomberg) -- China’s economic recovery is losing momentum after an initial burst in consumer and business activity early in the year, prompting calls for more policy stimulus to bolster growth.

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Official data Tuesday showed industrial output, retail sales and fixed investment grew at a much slower pace than expected in April. The figures were disappointing even though the low base of comparison from last year, when Shanghai was in lockdown, helped to boost the data.

A major worry was the jump in the unemployment rate for young people to a record high of 20.4%, a sign that the post-pandemic recovery isn’t strong enough to absorb the millions of new entrants to the labor market.

The data confirms signals from other recent indicators showing the recovery is waning. The property market remains weak despite early signs of a pickup in housing sales, inflation is close to zero and consumers are reluctant to borrow.

Economists say more policy action will be needed to keep the recovery going, although central bank steps alone won’t be enough to boost consumer and business confidence.

“Policy support is important, but the question is, which policy stimulus is most important,” Haibin Zhu, chief China economist at JPMorgan Chase & Co. said in an interview with Bloomberg TV. “Industry policy probably will play a more important role, then fiscal stimulus, particularly on the consumption stimulus.”

“Monetary policy can play a supplementary role, but honestly, a rate cut is not the most urgent response,” he said.

Chinese stocks closed 0.5% lower on Tuesday as Asian shares broadly gained. The onshore yuan weakened 0.17% to 6.964 per dollar as of 3:05 p.m. local time.

There were several warning signs in Tuesday’s data pointing to a faltering recovery. Property investment contracted 16.2% in April from a year earlier even though home sales grew, according to Bloomberg calculations based on official data. Construction of new homes continued to decline.

Output of key commodities used in construction, like aluminum and steel, fell in April from the previous month.

The People’s Bank of China hinted on Monday it will maintain a supportive policy, prompting some economists to predict it could take stronger action in coming months, including lowering the reserve requirement ratio or cutting interest rates. Tuesday’s data added to those calls.

“Consumption remained solid, yet the spike in youth unemployment to a record high raises questions about how sustainable that recovery can be,” said Michelle Lam, Greater China economist at Societe Generale SA. “Today’s data opens the door for further cuts in the reserve requirement rate and interest rates, possibly in June.”

The PBOC has refrained from aggressive rate cuts in recent years, preferring targeted stimulus measures instead. In a special section of its policy report on Monday, the PBOC said it has stuck to the so-called “attenuation principle” when making rate decisions, which means choosing a middle way, or relatively cautious approach toward rate decisions.

Zhang Yu, chief macro analyst at Huachuang Securities, said the PBOC’s report suggest chances for a rate cut are declining, but a reduction in the RRR is still possible in order to replenish liquidity.

What Bloomberg Economics Says...

The headline figures for production and retail sales rose – but only by comparison with last year’s terrible numbers, which cratered during Shanghai’s lockdowns. Measured against March, they are stalling. Meanwhile, slowing investment shows government spending isn’t gaining traction. Bottom line: The data are weak and add to the case for more monetary easing.

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Chang Shu and David Qu

A weakening global economy is also adding to China’s gloom. High inflation and rising interest rates in China’s major markets have cut consumer demand for Chinese-made goods. Exporters at China’s largest trade fair recently reported a drop in orders from overseas, while purchasing managers surveys also signaled weakness in the manufacturing sector.

The NBS on Tuesday highlighted global and domestic risks, saying “the global environment is still complex and grim, and domestic demand still looks insufficient.” The economy’s “internal drive for rebound is still not strong,” it said.

Retail sales were buoyed last month by car purchases and restaurant spending, the NBS data showed. Auto manufacturing also boosted industrial output last month, although textiles and pharmaceuticals output continued to contract.

Weaker Investment

Based on a two-year average growth rate, sales of property-related goods like construction materials and furniture contracted 11.5% and 5.7%, respectively, according to estimates from Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.

Infrastructure and manufacturing investment, which have helped to offset the slump in property investment, both slowed in April from the previous month, a sign of more subdued government spending and weak business confidence.

“Today’s weaker-than-expected data show how difficult it is to keep the growth engine running after restarting it,” said Pang. “China will continue to deliver strong year-on-year growth of activity data in the second quarter of 2023 on the back of a low base, but at a slower quarter-on-quarter pace than the first quarter as the recovery is losing steam.”

Goldman Sachs Group Inc. economists downplayed concerns the recovery was being derailed, sticking to their full-year growth forecast of 6% for this year.

“We don’t view April activity data as a turning point for growth,” the economists including Lisheng Wang wrote in a note after the NBS release. “We believe China’s consumption-led post-reopening recovery is still largely on track, but some persistent weaknesses in the economy may require more targeted policy support to counteract.”

--With assistance from Shikhar Balwani, Zhu Lin and Chester Yung.

(Updates with additional details.)

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