Economic growth slumped in China through the spring after a strong start this year, according to data released on Monday, as a real estate crash caused consumers to spend more cautiously.
The latest growth statistics for the world’s second-largest economy, covering April through June, put further pressure on the Communist Party as its leaders gathered on Monday in Beijing for a four-day conclave to set a course for the country’s economic future.
In a country known for strict controls on the flow of information, the Chinese government is maintaining a particularly tight grip ahead of the party gathering, known as the Third Plenum, which typically takes place every five years. China’s statistical bureau canceled its usual news conference that accompanies the release of economic data and Chinese companies are mostly avoiding the release of earnings reports this week.
China’s National Bureau of Statistics said that the economy grew 0.7 percent in the second quarter over the previous three months, a little below the expectations of most economists in the West. When projected out for the entire year, the data indicates that China’s economy grew during the spring at an annual rate of about 2.8 percent — a little less than half its growth rate in the first three months of this year.
The statistical bureau also revised down its estimate of growth in the first quarter. That growth rate, projected out for the full year, was about 6.1 percent, not the 6.6 percent rate that was disclosed in April.
Xi Jinping, China’s top leader, is trying to win confidence in his policies at home and abroad as growth falters and the property market suffers.
China has tried to offset the real estate downturn. Companies are building more factories — new investments in manufacturing surged 9.5 percent in the first half of this year — and stepping up exports.
But rapid expansion of manufacturing has led to a glut of goods, from chemicals to cars, and a lot of unused industrial capacity. Companies have sharply reduced prices to compete for consumers, who nonetheless remain reluctant to spend, long a problem for the investment-led economy.
At the same time, China’s record-setting export surge is provoking a global backlash of higher tariffs, as countries fear the flood of Chinese goods will overwhelm local industries. Yet in China, the extra export revenue has not been enough to fully offset weak consumer spending at home, resulting in a slowdown that poses a problem for China’s leadership as ordinary citizens are squeezed and foreign investors become disenchanted.
The statistical bureau summarized the state of the economy with a cautious statement. Progress had been made in upgrading Chinese industries, the bureau said, while adding that “the external environment is intertwined and complex, the domestic effective demand remains insufficient and the foundation for sound economic recovery and growth still needs to be strengthened.”
The slowdown in growth was less apparent in the Chinese government’s preferred statistic: how much larger the economy was in the second quarter of this year versus the same period last year. This measure showed the economy had grown 4.7 percent over the past 12 months, down from a 5.3 percent year-over-year economic expansion in the previous quarter.
China’s government has set a target for growth this year of “around 5 percent.”
The government is trying to revitalize consumer spending. Retail sales grew only 2 percent in June from a year earlier, as consumers became more cautious. Car sales slumped 6.2 percent in June from a year earlier, partly because automakers have cut prices to attract buyers.
Economists inside and outside of China have contended that Beijing should sharply increase state pensions, government-provided health insurance and welfare payments. Such measures could be funded by trimming China’s extensive military buildup or by transferring dividends and shares from state-owned enterprises to the national pension fund. But the government has been reluctant to redirect large sums of money from government agencies or state-owned enterprises.
Few expect drastic moves at the Communist Party conclave. The country continues to pursue an investment-led strategy that focuses on erecting more buildings instead of putting money into consumers’ pockets.
That trend was visible on a recent evening in Nanchang, a city in south-central China. The Wanshou Palace neighborhood has been extensively renovated with stone walkways, free music shows and many shops and restaurants. Throngs of tourists milled in the streets taking photos, but almost no one entered the stores or eateries to spend money.
Recent actions by local governments have taken money from households, further eroding their ability to spend. Faced with falling revenue because of the country’s real estate crisis, local governments have stepped up tax collection and audits, and have begun raising fees for services like natural gas, water and sometimes rail travel.
Many shoppers say that they buy the cheapest products they can find to stretch their limited budgets. Gong Yilan, a 21-year-old teacher, paid the equivalent of $3.40 for a pair of blue earrings as a souvenir during a vacation in Jingdezhen, another city in south-central China.
“If I spend too much on costly things, I don’t have enough money to support my next trip,” she said.
Local governments face financial difficulties mainly because of dwindling sales to developers of leases on state land. Builders are struggling to finish promised housing units and have scant cash to spare for investing in land for future projects.
“Simply put, with 20 million or so unfinished, presold homes behind in their delivery schedules, the housing crisis is not over yet,” Nomura, a Japanese bank, said in a research report on Wednesday.
Until recently, housing construction was one of China’s biggest industries, creating millions of jobs. Apartment sales finally appear to be leveling off after three years of declines, but at a very low level. As in many countries, the commercial real estate sector is starting to run into trouble in China as well.
Construction companies in China are trying to weather not just a slowing pace of domestic building but also dwindling orders from overseas. China has put a limit on loans to developing countries over the past several years, as many of these borrowers have struggled to repay previous loans.
Zhongmei Engineering Group, a Chinese construction company in Nanchang, used to build as much as 40 percent of its projects overseas, mainly in Africa. But now these projects are less than 20 percent of its business.
“They are not financially able to hire our company,” said Qin Jian, the general manager of Zhongmei’s international operations.
Like many Chinese construction companies, Zhongmei has turned to building more infrastructure and factories in China. Beijing has helped local governments borrow money to spend on new sewers, water lines, roads and other infrastructure.
A persistent worry is that China may have so much excess factory capacity that the economy may see a broad decline in prices — a dangerous phenomenon known as deflation. Falling prices give consumers an incentive to put off purchases in hopes of getting a better deal later and make it harder for borrowers to earn enough to repay their debts. Overall debt levels in China are higher than in the United States relative to the size of their economies, mainly because of heavy borrowing by state-owned enterprises. Many Chinese are struggling to make mortgage payments on apartments that are falling in value.
The National Bureau of Statistics announced on Wednesday that wholesale prices charged by factories, farms and other producers had dropped 0.8 percent in June from a year earlier. Consumer prices are still rising, barely: up just 0.2 percent last month from the year before.
The Chinese economy has had two bright spots in recent weeks, however. A decision to stop requiring visas for tourists from more European countries and Australia and New Zealand has produced an immediate jump in international visitors. Hotels in the heart of Shanghai and Beijing have raised prices sharply. But hotels even a couple miles away still charge rates that have barely increased since the worst days of the Covid-19 pandemic.
Much more important for the Chinese economy has been a powerful boom in exports of manufactured goods. The country’s overall trade surplus — the amount by which exports exceed imports — surged last month to a record $99 billion.
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