China Faces Heavy Burden Ahead of 3rd Plenum... Q2 Growth Rate Plummets (Comprehensive)

Q2 Economic Growth Slows to 4.7%
Domestic Demand Weakens... June Retail Sales Increase Limited to 2%

As China’s major plenary meeting, where the direction of economic policy will be presented, approaches, the release of a sluggish second-quarter growth rate is increasing the burden on the leadership. With expectations that detailed economic policies will be difficult to present, the combined economic growth rate for the first half of the year barely maintained the government’s target.

On the 15th, the National Bureau of Statistics of China announced that the second-quarter gross domestic product (GDP) increased by 4.7% year-on-year. This figure falls short of both expert forecasts (5.1%) and the previous month’s figure (5.3%).

The combined economic growth rate for the first half of the year, including the previously announced first-quarter results, was recorded at 5.0%. While this meets the Chinese government’s target of “around 5%” for this year, it is an unwelcome number given the expected challenges in the second half of the year due to weak domestic demand and exports, a real estate slump, and local government debt burdens.

Domestic demand, which has been the backbone of China’s economy, is also falling short of expectations. According to the National Bureau of Statistics, retail sales in China for June increased by only 2.0% year-on-year, falling below both the forecast (3.3%) and the previous month’s figure (3.7%). The 2.0% retail sales growth rate is the weakest since December 2022 (-1.8%).

Lu Ting, Nomura Securities’ Chief China Economist, explained in a recent investment memo that “resilient external demand is not sufficient to offset the downturn caused by weak domestic demand in China,” adding that “a slump in consumption and investment sectors is evident.” Earlier, Lu Ting had projected China’s second-quarter GDP growth rate at 4.6% in Bloomberg’s economic outlook survey.

Industrial production in the same month increased by 5.3% year-on-year, showing a weaker trend compared to the previous month’s growth rate (5.6%). However, it was an improvement compared to market expectations (4.9%). Industrial production aggregates the total output of factories, mines, and public utilities, reflecting manufacturing trends. It is also used as a leading indicator for employment and average income. As of the end of June, China’s unemployment rate stood at 5.0%, in line with the previous month’s figure (5.0%) and forecasts (5.0%).

Regarding the major economic indicators released that day, the National Bureau of Statistics stated that “China’s economy was generally stable in the first half of the year and made steady progress,” adding that “although there are fluctuations in form, it remains positive.”

Meanwhile, the 3rd Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), where the economic policy direction for Xi Jinping’s third term will be presented, opened on the same day at the Jingxi Hotel in Beijing for a four-day schedule. The Central Committee, formed through the National Congress held every five years, holds a total of seven plenary sessions during its five-year term. The meeting held on this day is the third session, which presents economic development policies and reform tasks.