China released a confusing set of economic data on Friday, comprising numbers that many argued didn’t add up. The economy only recorded a mild slowdown to 7.6% in the second quarter from 8.1% in the first, even though industrial production, an important contributor to gross domestic product, remained weak.
Electricity consumption, which was reportedly tipped by premier-in-waiting Li Keqiang as a more reliable figure than GDP, was flat, while car production decelerated in June. Modest growth was recorded in the production of steel and cement, which have long suffered from overcapacity.
However puzzling they may be, the numbers reveal what kind of economic slowdown the Chinese authorities want to admit to, and the stimulus measures they may deploy.
The growth rate of 7.6% is the slowest since the first quarter of 2009, and marks the first time since then that China’s economy has slipped below the much-emphasised 8% rate. Citi had previously forecast the economy would dip to below 7.5% in the second quarter.
But just how bad is China's economy? Judging by the response from policymakers, it is much worse than they thought. China’s central bank surprised the market by cutting interest rates twice during the month leading up to June’s economic data release.
Dong Tao, a regional economist at Credit Suisse, argued that monetary easing won't be effective in rescuing the economy. “Further cuts in interest rates can hardly generate business interest,” he said. “Nowadays, we believe it is not that funding costs are too high for investment growth, but that the private sector has altogether lost interest in investing in real business due to overcapacity and surging costs. For banks, it is the lack of quality borrowers who are still interested in receiving bank credit, instead of interest rates that are too high.”
According to Tao, China needs to break up state-owned monopolies in the services industry, where the private sector is still keen to invest. It should also cut tax rates, especially in the services sector. But none of this is likely to happen before the country changes its political leadership at the end of this year.
Sheng Laiyun, spokesman for the National Bureau of Statistics, said at a press briefing on Friday that China's economy remains “generally stable”, and claimed that 7.6% growth is very good considering the tremendous headwinds from an uncertain global economy.
He said the economic slowdown is partly the result of a decline in China’s potential growth rate after more than 30 years of high-speed expansion, and that the lower productivity will help the country alter its growth model.
China has slowed for six quarters in a row and the current pace of deceleration could see growth fall short of Chinese policymakers' annual target of 7.5%. The downward pressures on growth still remain in the near term, warned Qu Hongbin, China economist at HSBC.
“June's industrial production growth and import growth slowed faster than expected, underlining the still weak domestic demand — and the continuing de-stocking is evidence of falling producer prices,” he said. “The job market is under pressure, as the data release suggested slowing employment and wage growth among migrant workers, who are more sensitive to economic downturn.”
Sany Group, China's biggest maker of heavy equipment and the employer of roughly 70,000 people, was reported to have started slashing jobs in some units, though the company denied any cuts. Plans to reduce headcount have also leaked from other industrial manufacturers. Meanwhile, 6.8 million college graduates will flood the job market this year, according to the Ministry of Human Resource and Social Security.
Qu reckons policymakers in Beijing will be pressured to take more decisive easing actions in the coming months to reverse the growth slowdown.