China’s GDP Growth Unexpectedly Dips Below Official Target Range

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The GDP deflator — a broad measure of price changes in the economy — turned positive for the first time since early 2023. But that’s largely a result of the higher cost for imported products such as oil, and the underlying deflationary pressure stemming from a glut of goods still lingers.  

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Concerns over the health of the world’s second-largest economy have been intensifying since April as growth weakened and became more unbalanced. Though the energy shock unleashed by the war in Iran is helping drag China out of its yearslong deflation, consumer and business confidence is still sluggish.

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While exports are soaring to record highs and factory production is holding up well, thanks in large part to the global buildout of artificial intelligence infrastructure, tensions over trade fester abroad, threatening an economy that’s become reliant on sales overseas. The risk is that the gains of the boom remain concentrated in a few sectors such as electronics manufacturing and don’t trickle down to the broader economy.

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“China’s economy is starting to ease off the accelerator,” said Moody’s Analytics economist Sarah Tan. “Domestic demand remains the economy’s weakest link. The prolonged property downturn continues to weigh on household wealth and confidence, leaving consumers reluctant to spend and businesses hesitant to invest.”

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The historic plunge in FAI over the past year has raised alarms in China, calling into question the effectiveness of the main tool used by policymakers in the past to juice growth during downturns. 

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While China’s heavy reliance on investment has led to overcapacity and waste, it’s also stabilized the economy during times of distress, such as the global financial crisis almost two decades ago.

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David Li Daokui, a prominent economist and government adviser, said in a speech Saturday that before the recent slump, the gauge only contracted in 1961 and 1967, and the magnitude of the current fall is unprecedented.

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Almost all types of capital spending shrank in June. Property investment fell 18% in the first half from a year ago, its steepest decline in data going back to 1992, even though the drop in home prices eased in June.

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What Bloomberg Economics Says…

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“The disappointing performance highlights an urgent need for a change in policy tempo in the second half of the year. At a minimum, policymakers are likely to fast-track the delivery of the fiscal stimulus pledged in March. The case is also strengthening for more monetary easing.” 

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— Chang Shu and Eric Zhu. For full analysis, click here

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The picture of the economy painted by the latest data will likely raise questions again over the reliability of official statistics, specifically when it comes to the investment figures. 

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The FAI gauge has seen a historic slump for much of the past year, in what should have been a huge blow to an economy that counts on investment for about 40% of output. Yet China’s overall GDP has grown steadily, and gross capital formation — another measure of investment activity — has been among the biggest contributors to growth.

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In a reply to Bloomberg News late last year, the NBS explained the discrepancy by pointing to the differences in the scope of the two data sets and how they’re calculated. Still, many economists thought the gap was too large to be justified that way, and some said the fall in FAI could be exaggerated. 

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The investment contraction “is the culprit of the poor GDP in the second quarter,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “China will still need to deliver growth-supportive policy in the second half, best before the end of the third quarter. July’s Politburo is now our closely watched event.”