China's Q2 data disappoints; Should investors expect stimulus at this week's Third Plenum?
AInvestMonday, Jul 15, 2024 12:40 pm ET
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China's economic performance in the second quarter of 2024 has been disappointing, missing several key economic expectations and highlighting persistent challenges. The GDP growth rate was 4.7% year-over-year, falling short of the Reuters poll expectation of 5.1%. This slowdown from the 5.3% growth seen in the first quarter emphasizes the fragile nature of China's economic recovery amidst weak consumption and a prolonged property market downturn.

Retail sales in June grew by only 2%, significantly missing the 3.3% forecast. This underperformance in the consumer sector is a major concern, as it indicates weak domestic demand. Discretionary retail spending fell at the sharpest pace since the April 2022 Shanghai lockdowns. This sluggish consumer activity is a crucial factor dragging down overall economic performance.

On a slightly more positive note, industrial production exceeded expectations, growing by 5.3% year-over-year in June compared to the 5% forecast. High-tech manufacturing showed particularly strong growth, with an 8.8% increase in value added. Despite this, the overall economic momentum remains weak, as the benefits of strong industrial output are not enough to offset the challenges in the consumer and property sectors.

The People's Bank of China (PBOC) maintained its medium-term lending facility (MLF) rate unchanged and withdrew a net 3 billion yuan, marking the fifth consecutive month without a net cash injection. This cautious stance from the PBOC suggests a reluctance to engage in aggressive monetary easing, even as the economic data indicates a need for more stimulus to support growth.

China's housing market continues to struggle, with home prices for both new and used properties extending their decline. Property investment fell by 10.1% in the first half of 2024 compared to the previous year, and home sales by floor area dropped 19%. The protracted property crisis is significantly impacting consumer confidence and local government revenues, posing a major obstacle to economic stability.

In response to the economic challenges, analysts are calling for more fiscal and monetary easing. Goldman Sachs economists, led by Lisheng Wang, have revised their forecast for China's 2024 growth down to 4.9% from 5.0%, citing weak domestic demand and the ongoing property crisis. Additional property-supporting measures are anticipated following the Politburo meeting later this month, as Beijing seeks to bolster confidence and stimulate growth. Despite these efforts, hitting the 5% annual growth target remains a challenging task, requiring significant policy intervention.

In the meantime, markets await potential stimulus announcements at the country's Third Plenum this week. This is a significant meeting held every five years by the most senior leaders of China's Communist Party. This gathering is crucial as it sets the long-term policy direction for the country. Unlike other meetings focused on immediate economic adjustments, the Third Plenum serves as a forum to outline broad, strategic overhauls that guide China's development for the coming years. It is not typically a venue for announcing near-term macroeconomic policies, which are more likely to emerge from subsequent meetings, such as the upcoming Politburo session.

Analysts have tempered expectations for this year's Third Plenum, given the persistent economic challenges China faces. The property market, once a robust growth driver, remains weakened, and both consumer and business confidence are at low levels. Additionally, rising protectionism from Western countries threatens China's export sector. Investors have been disheartened by previous unmet promises of economic reform and are not anticipating significant breakthroughs from the Plenum. The MSCI China index's $2 trillion loss since its peak in February 2021 reflects this deep-seated skepticism and low expectations.

Observers expect the Third Plenum to reinforce the economic agenda that President Xi Jinping has been promoting, which includes investing in technology and green energy, upgrading the industrial base, and enhancing self-reliance amid geopolitical pressures. Analysts like Michael Hirson of 22V Research anticipate discussions on urbanization reforms to improve access to social services for migrants and measures to address local government debt burdens. Andy Rothman of Matthews Asia suggests that any shift in leadership rhetoric that reassures private companies, particularly those affected by policy crackdowns, could positively impact investor sentiment. Such reassurances are critical, as private enterprises play a vital role in urban employment and economic growth.

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