China’s weak economy awaits new remedies

Pre-meeting reminder. Chinese leaders will have no illusion on the challenges they have to tackle in the second half and beyond. As some 370 top-level Communist Party officials gathered on Monday for the five-yearly Third Plenum meeting, surprisingly weak GDP data released on the same day raises the stakes for the policy roadmap they will outline.

The economy logged a lacklustre 4.7% year-on-year growth in the second quarter. Economists were expecting a less rosy print following the 6.3% in the same quarter a year earlier, and the 5.3% result in the first three months of 2024. The latest figure is nonetheless sobering.

Property investment fell 10.1% in the first six months. New home prices were down 4.5% in June from a year earlier, the fastest pace of monthly decline in nine years, per official data. It suggests measures announced on May 17, including easing mortgage rules and extra funding for local governments to absorb unsold inventory, are not sufficient for the market to find a bottom.

That is also a drag on consumption. Retail sales grew 3.7% in the first half but slowed down to just 2% in June. Foreign trade offers one of the few bright spots; exports grew 6.9% in the first half and 10.7% year-on-year last month. Yet continuing reliance on this engine to prop up growth will deepen tensions with the U.S. and European Union where governments are worrying about China's overcapacity.

By one of its own measures, China is not too far off course. The State Council has set a growth target of “around 5%” for 2024, allowing the economy room to continue expanding at its current pace. Beijing hints it is happy to tolerate a slower headline figure to fulfill its wish to move away from an old model driven by debt and property investment, towards one that emphasises innovation, and quality over quantity. There's little evidence the rebalancing is working, however.

President Xi Jinping has talked up his plans in recent months for “a series of major measures” to reboot growth, and previous Third Plenums in 1993 and 1978 jolted the economy by tackling structural issues. The latest GDP data hammers home the need for similarly decisive measures to emerge this week.