Introduction:
Hong Kong — China has reported economic growth that exceeded expectations for the second quarter, even as it navigates an ongoing trade war with the United States. Efforts to diversify into non-US markets have helped boost exports. According to the National Bureau of Statistics (NBS), the gross domestic product (GDP) grew by 5.2% in the second quarter compared to the same time last year, which is slightly above the average forecast of 5.1% from a survey of 40 economists conducted by Reuters last Friday. However, this growth marks a slowdown from the 5.4% increase seen in the first quarter of the year. When looking at the first half of the year as a whole, GDP growth stands at 5.3% compared to the same period last year, according to the NBS. Sheng Laiyun, the deputy commissioner of the NBS, noted that this growth was achieved “under the challenging circumstances of rapidly shifting international dynamics and significantly increased external pressure since the second quarter.” He added, “We are also keenly aware that the external environment remains complex and volatile, internal structural problems have yet to be fundamentally resolved, and the foundation of economic performance still needs to be further strengthened.” China’s economy is facing increasing external and internal pressures as it strives to meet its ambitious growth target of “around 5%” for the year, a goal that economists believe will be difficult to reach without additional policy support. The tariff offensive initiated by US President Donald Trump, which at one point saw tariffs on Chinese imports soar to 145%, has disrupted what is arguably the most significant bilateral trade relationship in the world. Following a truce reached in Geneva in May that reduced the triple-digit tariffs, Beijing has until August 12 to secure a permanent agreement with Washington. For China’s export-driven economy, the outcome of the tariff negotiations will be crucial. Even a double-digit levy would carry profound and lasting implications for Chinese manufacturers – a key pillar of the country’s economic engine.
Headwinds:
The Chinese economy is still grappling with a range of structural issues, including a long-standing property crisis, rising youth unemployment, sluggish consumer spending, and ongoing deflation. In June, consumer spending didn’t quite meet expectations, while industrial production surprisingly exceeded them, as reported by the NBS on Tuesday. Retail sales grew by just 4.8% compared to the same month last year, a drop from May’s 6.4% growth. On the other hand, industrial output saw a 6.8% increase from June last year, up from 5.8% the previous month, likely thanks to a temporary trade truce. However, the housing market is slowing down again, putting pressure on the economy after a brief recovery following last year’s stimulus, as noted by Larry Hu, Macquarie Group’s chief China economist, in a research note on Wednesday. Investment in the housing sector plummeted by 11.2% in the first half of the year compared to the same period last year, according to NBS data. Nick Marro, principal economist for Asia at the Economist Intelligence Unit, shared with CNN that while the trade war has affected market sentiment, it hasn’t turned into the major shock to China’s economic performance that many investors feared back in April. Yet, with ongoing weaknesses in the domestic economy—like low consumer confidence and continued stress in the property sector—he anticipates that China will just miss its annual growth target for this year. Marro also pointed out that there’s a disconnect between the GDP figures and what businesses and households are experiencing. “For many, it doesn’t ‘feel’ like an economy growing at around 5%—that sentiment has implications for the sustainability of future retail spending, as well as for businesses considering expansion, hiring, and wage growth,” he explained. Even though growth in the first half of the year surpassed the 5% target, economists have warned that existing challenges could hinder exports and slow down economic momentum in the coming months.Zichun Huang, an economist at Capital Economics, wrote in a Tuesday research note that the economic outlook for the rest of the year remains “challenging.”
With tariffs set to remain high, fiscal ammunition being depleted and structural headwinds persisting, growth is likely to slow further over the second half
Export picks up amid trade truce:
In June, manufacturers in China took advantage of the trade truce with the US and expanded their supply routes, resulting in a 5.8% increase in overall exports compared to the same month last year, surpassing analysts’ expectations, according to trade data released on Monday by China’s General Administration of Customs. Meanwhile, imports saw a slight rise of 1.1%, marking the first monthly uptick in inbound shipments since February. Interestingly, exports of rare earth materials soared by 32% in June compared to a year ago, indicating positive momentum as China agreed to facilitate the flow of these critical elements, which are vital for everything from electronics to vehicles and fighter jets, following discussions in London with the US last month. However, outbound shipments to the US fell by 16.1% from the same month last year due to ongoing trade tensions. On a brighter note, exports in June experienced a month-on-month growth of 32% after the Geneva agreement. For the first half of the year, exports to the US dropped by 9.9% compared to the previous year, with second-quarter shipments plummeting nearly 21%. Southeast Asia has notably emerged as a key export destination, taking the place of the US. Exports to the 10-country Association of Southeast Asian Nations (ASEAN) surged by over 18% compared to June last year. China is increasingly looking to its neighboring economies not just as end markets but also as logistical hubs, routing goods through countries like Vietnam to avoid US tariffs—a strategy that the Trump Administration has pledged to address. As part of a trade agreement with Vietnam, Trump announced a 40% duty on imports that are transshipped through Vietnam. Chinese exports to Vietnam rose by more than 25% last month compared to June last year. At a press conference on Thursday, Chinese officials highlighted how the country has broadened its “circle of friends,” with increased exports to the European Union, South Korea, and Japan, in addition to ASEAN, during the first half of the year.
Deflationary pressure persists:
In China, the economy is currently facing some tough challenges with deflation. According to data from the National Bureau of Statistics (NBS) released last week, the Producer Price Index (PPI) saw a significant drop of 3.6% in June compared to the same month last year. This marks the steepest decline we’ve seen in almost two years, extending the streak of producer deflation to an astonishing 33 months in a row. On a brighter note, the Consumer Price Index (CPI), which is a key indicator of inflation, ticked up by 0.1% compared to last year, breaking a four-month downward trend. However, deflation can be quite concerning as it tends to make people hold off on spending, hoping for even lower prices down the line. This reluctance to spend can really put a damper on consumption, which is crucial for economic growth. Analysts believe that the slight increase in consumer prices is largely due to government subsidies on consumer goods. However, they caution that this recovery might not last long as the effects of these stimulus measures begin to wane. The ongoing deflationary pressures are putting a squeeze on business profits and wages, worsened by price wars and overcapacity issues, particularly in the auto sector. As a result, authorities are becoming increasingly worried and are urging companies to stop the aggressive discounting practices.
New measures to boost employment
In light of the ongoing economic struggles and external pressures like tariffs, China’s cabinet, known as the State Council, rolled out a series of measures on Wednesday aimed at “stabilizing employment.” These initiatives include expanding social insurance coverage, offering subsidies, providing loan support, and facilitating vocational training for specific groups, particularly the youth. As of June, China’s urban unemployment rate was at 5%, which is below the government’s annual target of 5.5%, according to the National Bureau of Statistics (NBS) on Tuesday. However, youth unemployment continues to be a significant issue. For those aged 16 to 24, the unemployment rate was still high at 14.9% in May, even though it had dipped to its lowest point in almost a year. Meanwhile, the rate for individuals aged 25 to 29 fell to 7% during the same timeframe. Under the new measures, the government plans to offer a one-time subsidy of up to 1,500 yuan (about $209) to companies and social organizations that hire unemployed youth aged 16 to 24 and cover their full insurance for at least three months, as stated in the notice. Additionally, the State Council has instructed local authorities to provide personalized support to graduates who are having difficulty finding jobs, which includes at least three job recommendations. For those who remain unemployed after graduation, continued assistance will be available, such as policy briefings, career guidance, job leads, and opportunities for training or internships, according to the notice.
You May Like Reading:
China posts better-than-expected Q2 growth in face of Trump tariffs
