China's Economic Growth Rate Fails to Enter 8% Range (Comprehensive)

7.9% Growth in Q2, Below Market Expectations... Half of Previous Quarter
Active Fiscal Policy Expected Amid Downside Economic Risks in Second Half

[Asia Economy Beijing=Special Correspondent Jo Young-shin] China's economic growth rate for the second quarter failed to enter the 8% range.

China's National Bureau of Statistics announced on the 15th that the second quarter gross domestic product (GDP) growth rate was preliminarily estimated at 7.9% year-on-year. The second quarter growth rate is less than half of the first quarter's (18.3%). Bloomberg had predicted that China's second quarter GDP would grow by 8.0% year-on-year. Additionally, major Chinese financial institutions forecasted an 8.9% growth for the second quarter.

[Image source=Reuters Yonhap News]

◆ China GDP Falls Short of Expectations = China's economy grew by only 7.9% in the second quarter. Major global economic institutions were optimistic that China's economy would show growth rates in the 8% range in the second quarter.

It was widely expected that China's economy would show a "high first half, low second half" growth pattern as the base effect weakened after peaking at 18.3% in the first quarter. However, considering that the growth rate in the second quarter of last year was 3.2%, there was optimism that China's economy would sufficiently grow in the 8% range in the second quarter of this year.

The key economic indicators released by China's National Bureau of Statistics on this day all showed a slowdown compared to the previous month. Industrial production, which reflects manufacturing and mining production trends, came in at 8.3%, falling short of the previous month's 8.8%. Retail sales also recorded 12.1%, lower than the previous month's 12.4%. Fixed asset investment (January to June), which provides insight into investment conditions, dropped significantly to 12.6% from 15.4% in January to May.

The sharp rise in international raw material prices appears to have affected industrial production such as manufacturing. Also, domestic demand did not support the economy as much as the Chinese government had expected.

Chinese economic media Caixin reported that a survey of 15 domestic and international institutions showed an average second quarter growth rate of 8.1% (median 8.2%), with a forecast range of 7.2% to 8.7%, and evaluated the preliminary second quarter figure as lower than market expectations.

◆ Concerns Over Downside Economic Risks = The Chinese government set this year's economic growth target at "6% or above," but major global economic forecasting institutions and domestic economic agencies were optimistic about growth in the 8% range. The Chinese leadership also seems to expect growth in the 8% range, despite setting a lower official target.

The problem is that unexpected rises in international raw material prices, COVID-19 variants, increasingly complicated US-China conflicts, and the strengthening yuan are raising concerns about downside economic risks.

Furthermore, the base effect will disappear from the second half of the year. China's economy plunged to minus (-) 6.8% in the first quarter of last year due to the spread of COVID-19. In the second quarter, it recorded 3.2%, successfully achieving a 'V'-shaped rebound. As COVID-19 was controlled in the second half of last year, China's economy grew by 4.9% in the third quarter and 6.5% in the fourth quarter, moving toward economic normalization.

The National Bureau of Statistics analyzed that the spread of COVID-19 in some regions such as Guangdong Province affected consumption but evaluated that a continuous economic recovery is underway. As evidence, the bureau emphasized improvements in employment conditions. It explained that 6.98 million new jobs were created nationwide in the first half of the year, achieving 63.5% of the annual target. The nationwide unemployment rate was reported as 5% by the bureau. However, the unemployment rate for those aged 16 to 24 was 15.4%, indicating persistent employment pressure on the youth.

Major international institutions such as the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the World Bank forecast China's economy to grow by 8.4% to 8.5% this year.

◆ China Takes Preemptive Measures Including Reserve Requirement Ratio Cut = It appears that the Chinese leadership had already detected downside economic risks.

On the 12th, Premier Li Keqiang expressed his intention to "support the real economy through proactive fiscal policies in the second half" during a roundtable with economic analysts and businesspeople. He assessed the economic situation by saying, "Although China's economy is sound, the sharp rise in international raw material prices has increased costs for enterprises, worsening difficulties for small and medium-sized enterprises." He also mentioned the issuance of special bonds by local governments to support businesses.

The People's Bank of China, the central bank, also lowered the reserve requirement ratio (RRR) by 0.5 percentage points on the same day. A cut in the RRR increases the lending capacity of financial institutions. As a result of this RRR cut, Chinese financial institutions such as banks secured 1 trillion yuan (approximately 177 trillion Korean won) in lending capacity.

Last month, the People's Bank of China reformed the deposit interest rate calculation method and lowered interest rates on medium- to long-term deposit products with maturities of one year or more. Lowering medium- to long-term deposit rates creates additional lending capacity for the financial sector. The People's Bank of China also reduced various financial transaction fees to ease the financial burden on consumers.

The National Bureau of Statistics explained that although growth momentum slowed in the second quarter, China's economy is still showing steady recovery, and given the external uncertainties, economic management within a reasonable range is necessary.

This content was produced with the assistance of AI translation services.