China’s Economic Growth Stalls Amid Weak Retail Spending

China’s economic growth has slowed due to weak retail spending, with the annual growth rate of 4.7% in the second quarter falling short of the expected 5.1%. Retail sales growth dropped to 2% in the three months ending in June, the weakest since emerging from COVID-19 lockdowns.

This is of major concern due to China’s position as the world’s second-largest economy, combined with the signaling of a lack of confidence from consumers.

“A negative wealth effect from falling property and stock prices, as well as low wage growth amid various industries’ cost cutting is dragging consumption and causing a pivot from big-ticket purchases toward a basic ‘eat, drink and play’ theme.”

Lynn Song, chief China economist at ING Bank

Falling house prices, low wage growth, and cost-cutting measures in various industries have dampened consumer confidence and spending. Despite the government’s 5% growth target for 2024, achieving it seems challenging without significant fiscal measures. While infrastructure investment and hi-tech manufacturing have increased, and export growth remains strong, the property market shows only tentative signs of recovery.

Furthermore, to counter the real estate downturn, China has boosted investments in manufacturing, which surged by 9.5% in the first half of the year, and increased exports. However, this rapid manufacturing expansion has resulted in an oversupply of goods and underutilized industrial capacity. Companies have cut prices to attract consumers, who remain hesitant to spend, reflecting a longstanding issue in China’s investment-driven economy.

The export increase has triggered higher tariffs globally, as countries protect their industries from a flood of Chinese goods. Despite increased export revenue, it hasn’t fully compensated for weak domestic consumer spending. The statistical bureau acknowledged progress in industrial upgrades but noted insufficient domestic demand. Consequently, shares of major Chinese companies fell in Hong Kong trading.

China’s recent gain comes from the “decision to stop requiring visas for tourists from more European countries and Australia and New Zealand,” which has led to an increase in international visitors. “Hotels in the heart of Shanghai and Beijing have raised prices sharply,” according to the New York Times.