China's Economy Faces Sluggish Growth as Property Sector Slumps

China's economy experienced a modest 0.8% growth in the second quarter compared to the preceding three months, according to an announcement by the government on Monday. While the quarterly GDP showed a healthier expansion of 6.3% compared to 2022, it is essential to note that the growth was measured during a period when strict COVID lockdowns severely impacted the global supply chains, resulting in a halt in economic activity.

Despite initially anticipating a swift recovery after abandoning the zero-COVID policy, Chinese President Xi Jinping witnessed a sluggish rebound in the country's GDP growth. Several factors contribute to this lackluster economic performance. Firstly, the mammoth property sector, estimated to account for a significant quarter of the GDP, remains in a slump. The collapse of real-estate giant Evergrande in late 2021 has left both developers and buyers cautious. Developers struggle to secure loans for financing projects, while potential homebuyers hesitate to invest in properties that might not be constructed.

Furthermore, as approximately 70% of Chinese household savings are tied to real estate, a weakened property sector restricts the accumulation of wealth necessary for consumer spending, a vital driver of a modern economy.

Secondly, Xi's unpredictable economic policies have unsettled foreign investors, who now perceive China as a less secure destination for their investments. Beijing's new anti-espionage law has increased the risk for US companies, particularly amidst the broader US-China economic rivalry. The upcoming enforcement of US investment restrictions, aimed at preventing inadvertent funding of Chinese military programs by American corporations, is expected to exacerbate the situation.

Thirdly, the Chinese government's attempts to stimulate the economy through demand-side measures and increased consumption have yielded disappointing results. While traditional methods of supporting manufacturers and investing in infrastructure have been implemented, direct cash support to consumers to boost spending on goods and services has been rejected. Despite lower interest rates, many Chinese families are reducing their expenditure and adopting a wait-and-see approach, contributing to deflationary pressures.

The underperforming economy poses a significant challenge for Xi, who aims to achieve a rather mediocre 5% GDP growth target for 2023. However, it is unlikely that the Chinese leader will resort to substantial stimulus measures, as he aims to avoid further debt and believes the economic downturn can be weathered by the year's end.

Source: Gzero media