China’s Economy Faces Headwinds Despite 5.2% Growth
Despite official reports of robust economic expansion, a deeper look reveals significant challenges lurking beneath the surface of China’s seemingly strong performance.
Official Growth Figures Mask Deeper Issues
China’s statistics office reported a 5.2 percent economic growth for the second quarter. However, experts caution that this figure masks underlying structural problems that are expected to intensify in the latter half of the year.
Overcapacity Poses Greater Threat Than Tariffs
“For China’s economy, overcapacity is worse than Trump’s tariffs,” stated **Alicia García-Herrero**, Asia-Pacific chief economist at Natixis. She highlighted the damaging price competition stemming from excessive production, a problem that persists regardless of international trade disputes.
Erosion of Growth Drivers
While rising exports bolstered the first half of the year, this momentum may wane. Similarly, state-subsidized consumption boosts are anticipated to be short-lived, leaving a void in growth impetus for the remainder of the year, according to analysis from the China Beige Book (CBB).
Mounting Deflationary Pressures
Persistent declines in producer prices, marking 33 months of falling rates, indicate that companies are producing far more than the domestic market can absorb. This oversupply forces aggressive price cuts, increasing the risk of deflation. Deflation, experts warn, can be more damaging than inflation as it discourages spending, with consumers anticipating even lower prices.
Corporate Financial Strain and Zombie Companies
The intense price competition and weak domestic demand are shrinking corporate profits, leaving many Chinese businesses with “hardly any air to breathe,” according to **García-Herrero**. This has led to a significant increase in “zombie companies,” particularly within the renewable energy sector, where market dominance has come at a steep financial cost.
Private Investment Falters Amidst Uncertainty
Reduced profit prospects and heightened economic uncertainty have led to a sharp decline in private investment. Data from the Chinese central bank shows a drop in credit demand from both businesses and households in June, a key indicator of future economic activity. The lack of uptake in loans, even at historically low interest rates, suggests a potential loss of effectiveness for monetary policy measures, as noted by **Derek Scissors**, chief economist at CBB.
Productivity Stagnation Despite “New Productive Forces”
Despite substantial investments aimed at fostering “new productive forces” to modernize the economy, productivity has failed to increase. Innovations have not yet materialized to the extent needed to drive significant growth, according to **García-Herrero**.
Real Estate Crisis Continues to Haunt Recovery
The real estate market remains in crisis, with investments falling over 11 percent in the first half of the year. While government support measures are in place, falling property prices continue to dampen activity. The shrinking population further complicates recovery, as it reduces the fundamental demand for new housing, a sector that previously contributed significantly to economic growth.
Trump’s Trade Policies Exacerbate Challenges
The trade war with the United States continues to hinder China’s export access to its most important foreign market. Even with temporary tariff pauses, U.S. tariffs remain substantially higher. While strong exports to other nations have mitigated the immediate impact, persistent high tariffs could reduce China’s economic growth by an estimated 1.6 percentage points, potentially jeopardizing 4 to 6 million jobs. Furthermore, U.S. trade agreements with countries like Vietnam aim to prevent China from rerouting its exports through these nations.
Debate Intensifies Over Future Growth Strategies
In light of these challenges, a critical debate is underway among Chinese economists and policymakers regarding future growth drivers, especially as the nation prepares its next five-year plan. There is a growing recognition that insufficient attention has been paid to the demand side of the economy, with calls to increase private consumption’s share of GDP. **Yang Weimin**, a former advisor on five-year plans, advocates for private consumption to exceed 50 percent of GDP by 2035 to foster greater economic stability. Similarly, **Wang Yiming**, formerly with the National Development and Reform Commission, stresses that boosting domestic demand is crucial for achieving growth.
Production-Centric Policies Under Scrutiny
Despite repeated calls to strengthen internal demand, China has historically favored production-driven growth, which offers greater control over financial flows. It remains to be seen whether the current pressures will force a shift away from this established mantra. Upcoming Politburo meetings in July are expected to address economic stabilization measures, potentially including new initiatives for the beleaguered real estate sector.
