Has China Missed the Golden Time for Economic Recovery... Eyes on the Last Chance

China's economy showed a slower-than-expected recovery in the first half of this year, raising concerns about a potential downturn. Market attention has focused on the upcoming Politburo meeting at the end of this month, where economic policies and the government's stimulus intentions are expected to be revealed. Some analysts believe the golden window for economic normalization has already passed, and it is unlikely that large-scale stimulus measures exceeding expectations will be introduced.

Disappointing Q2 Results... Nothing Positive
Industrial Production Improved but Sustainability Not Guaranteed

On the 17th, China's National Bureau of Statistics released economic indicators for Q2 and June, all of which fell short of expectations. The Q2 GDP growth rate was 6.3% year-on-year, significantly below market forecasts of 7.0-7.3%. Considering that Shanghai's lockdown caused last year's Q2 GDP growth to be only 0.4%, this is a disappointing figure. The quarter-on-quarter growth rate dropped to 0.8%, down from 2.2% in Q1. Domestic demand also looks bleak. Retail sales in June increased by 3.1% year-on-year, missing the forecast of 3.2%. The Q1 retail sales growth rate was 12.7%.

June industrial production, which reflects manufacturing trends, rose 4.4% year-on-year, surpassing both the previous month's 3.5% and the forecast of 2.7%. However, it is uncertain whether this rebound will continue. According to MySteelNetworks data, as of the 14th, the blast furnace operating rate of 247 steel mills in China fell by 0.15 percentage points from the previous week to 84.33%. The China Iron and Steel Association reported that profits of major steel companies from January to May this year plunged 71.1% compared to the previous year.

The youth unemployment rate (ages 16-24), considered a trigger for the Chinese economy, soared to 21.3%, breaking the previous record set in May (20.8%). The overall unemployment rate remained stagnant at 5.2% for the fourth consecutive month since March.

The Key Issue: Whether a 'Large-Scale Stimulus Package' Will Be Announced
Expected to Be Discussed at July Politburo Meeting
Major Measures Unlikely... Expected to Have Limited Impact

[Image source=EPA Yonhap News]

With a poor performance report, China is now struggling to achieve its somewhat conservative economic growth target of around 5%. The combined GDP growth rate for the first half of the year, including Q1, stands at 5.5%. If growth further deteriorates in the second half, maintaining the 5% target could become difficult. Last year's Q3 and Q4 growth rates were 3.9% and 2.9%, respectively, making it unlikely to expect a dramatic base effect in the second half of this year.

In a global economic downturn with weak external demand, the only support China’s economy can rely on is a large-scale government stimulus package. The announcement is expected at the Politburo meeting at the end of this month. Politburo meetings are usually held monthly, with the July and December meetings drawing the most attention as they reveal the economic management direction and policy stance for the second half of this year and the first half of next year, respectively. The government’s stimulus intentions can also be inferred from the nuances of these meetings.

Expected government stimulus measures include lowering the reserve requirement ratio, easing housing transaction regulations in major cities, expanding policy bank loans, issuing local government bonds, and consumer stimulus packages. According to Bloomberg, Goldman Sachs economists expect the stimulus scale to be more cautious than in previous downturns, while Frederick Neumann, HSBC’s chief Asia economist, predicts targeted support rather than broad-based aid. ANZ strategist Xing Jiaofeng said, "Following the disappointing data release, the government may stimulate fiscal spending to boost investment," adding, "The next two weeks will be a key focus for follow-up policies."

The market consensus is that predictable policy measures will struggle to reverse the sluggish trend seen in the first half. Nomura’s senior China economist Lu Ting said, "We expect Beijing to introduce a series of support measures in the second half, including two 0.1 percentage point interest rate cuts," but added, "However, these measures may not be enough to turn the situation around."

Following the data release, Wall Street firms collectively downgraded their growth forecasts for China this year. Morgan Stanley lowered its forecast from 5.7% to 5.0%, while JP Morgan and Citigroup each cut theirs from 5.5% to 5.0%. Citigroup noted, "China may find it difficult to achieve the economic growth target of 'around 5%' announced by the government last March."

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