Moneycontrol Pro Panorama | China’s overflowing cup of economic woes

Chinese economy is facing a classic balance sheet recession.

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China’s Q2 GDP was expected to come in at 5.1 percent according to consensus estimated, but the actual figure was a much lower 4.7 percent. Retail sales growth slowed down to 2.7 percent in June compared to 3.7 percent in May. While the Shanghai index was trading flat, the Hang Seng was down by 1.6 percent at 12.25 pm. Two significant growth engines of domestic consumption and the property sector are struggling to pick up pace and that’s hurting the country’s growth.

The government has been ultra-cautious in the stimulus measures being undertaken to revive growth, unwilling to take on bigger measures that could boost growth in the short-term but give it a bigger headache to tackle later on. One of those headaches is its property sector that soared on a debt-fuelled construction and buying binge that eventually imploded and left banks, developers and property buyers reeling under the impact.

The people are unhappy, calling this period “the garbage time of history”. My senior colleague Manas Chakravarty writes on the challenges facing the country, as the Third Plenum of the Central Committee of the Communist Party of China is being held this week. The markets don’t have too much hope of the government straying from its chosen path for economic growth. “But not using strong medicine could also turn a fever into pneumonia. Chinese retail inflation was a mere 0.2 percent year-on-year in June, barely above deflationary levels. The economy is facing a classic balance sheet recession. Nobody wants to spend,” he writes. Even if not a big-bang stimulus, the government could cheer markets by adopting a friendlier approach towards the private sector and turn more welcoming of foreign investors.

The economic situation has implications for social stability as well, as sketched out in today’s FT selection (free to read for MC Pro subscribers). The slow growth, unemployment problem, the housing crisis are leading to psychological problems, according to the report. It also quotes a survey’s findings in 2023 to say that the Chinese no longer see hard work as a key route to success and saw non-merit factors as relatively more important determinants of whether one is rich or poor. Do read to know more about the effects of China’s slowing growth on its people.

No discussion in China will be complete without geopolitics making its way in. Today’s MC Pro edition also includes a column by Saibal Dasgupta on the Western world’s discomfort at the extent of support China has provided Russia, allowing its economy to do well despite sanctions. They want India and China to join forces with NATO in imposing sanctions on Russia, but there's little chance of them succeeding in that endeavour. Do read to know more about the implications.

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Ravi Ananthanarayanan
Moneycontrol Pro