Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Economy Is Slowing as Stimulus Calls Grow
Transcript
- Lucas: China just reported its slowest quarterly growth since 2022, and the number is getting everyone's attention. Gross domestic product expanded at a 4.2 percent annual rate in the second quarter, well below the 4.8 percent the market was expecting. Luna: That's a significant miss. And it's not just one bad quarter — this is the fourth consecutive quarter where growth has come in below the government's own target. Lucas: Right. The official target for 2026 is around 5 percent, but with Q1 at 4.5 percent and Q2 at 4.2 percent, you're already running behind. The question everyone is asking now is whether Beijing will finally roll out a major stimulus package to close the gap. Luna: We've heard calls for stimulus for months. What's changed this time? Lucas: What's changed is the data is getting harder to ignore. Look at the trade numbers. Exports are still growing, but imports are growing faster. The trade surplus narrowed to 77.6 billion dollars in May, down from 54.6 billion the month before. That suggests domestic demand is picking up slightly, but not enough to offset the broader weakness. Luna: So imports are rising, which is usually a sign of economic strength. But in this case, it's more about commodity prices and restocking than genuine consumer demand. Lucas: Exactly. The consumer side remains the big problem. Retail sales grew just 3.6 percent year-over-year in June, down from 4.1 percent in May. And household savings are still at elevated levels — people are hoarding cash rather than spending. The property market is a big part of that psychology. Luna: Property investment fell another 6.7 percent in the first half of the year. That's a massive drag on everything from construction jobs to local government revenue. Lucas: And local governments are already cash-strapped. They used to rely on land sales for a big chunk of their income, but developers aren't buying land like they used to. So the central government is under pressure to step in. Luna: What tools does the People's Bank of China actually have left? Interest rates are already low. Lucas: They still have room to cut the reserve requirement ratio — that's the amount of cash banks must hold in reserve. A cut would free up liquidity for lending. They could also lower the loan prime rate, which is the benchmark for corporate and household loans. But the problem is transmission. Even if banks have more money to lend, businesses and consumers need to want to borrow. Luna: Right now, confidence is low. The yield on the ten-year Chinese government bond is around 2.3 percent — that's near historic lows, signaling that investors are piling into safe assets rather than riskier investments. Lucas: And the yuan is hovering around 6.78 per dollar, which is weaker than it was a year ago but not dramatically so. The PBOC wants to avoid a sharp depreciation because that would spook foreign investors and make imports more expensive. But they also don't want to tighten monetary policy to defend the currency when growth is slowing. Luna: It's a balancing act. One area where we are seeing some policy action is infrastructure. There have been reports of accelerated approvals for railway and water projects. Lucas: Yes, but infrastructure spending has diminishing returns. China already has some of the best high-speed rail and highways in the world. Each new project adds less to economic output than the last one. The real leverage is in consumer confidence, and that's harder to fix with a checkbook. Luna: Let's look at what the stock market is telling us. The FXI, which tracks Chinese large-caps, is up about 1 percent over the past five days. But the KWEB, which tracks tech stocks, is down nearly 1 percent. So it's mixed. Lucas: Within that, there's a lot of dispersion. Baidu is down almost 7 percent on the week, which is a big move. That's likely tied to concerns about its AI monetization timeline and advertising revenue. Meanwhile, JD is up over 4 percent, and Alibaba is up over 3 percent. E-commerce names are benefiting from some stabilization in consumer spending. Luna: So the market is pricing in a divergence — some companies are well-positioned for a slower growth environment, others are not. That's a healthy sign, actually. It means investors are being discriminating rather than just selling everything China. Lucas: Speaking of the market — if today's conversation about the real economy versus the stock market has made something click for you, that's exactly the kind of thing listener support helps keep going. This show is ad-free because of people who find value in it and chip in at buy me a coffee dot com slash fexingo. Smallest possible ask, genuinely appreciated. Luna: Yeah, it makes a difference. And it keeps us free to focus on the data rather than advertisers. Lucas: So back to stimulus. There's growing speculation that the Politburo, when it meets later this month, will announce measures focused on boosting household income. That could include tax cuts for lower-income earners or direct cash handouts, which China has been very reluctant to do in the past. Luna: Direct cash transfers would be a big shift. But they're being discussed seriously now because the usual tools aren't working. Lucas: The other piece is fiscal policy. Local governments have been told to accelerate special bond issuance for infrastructure, but they're constrained by debt limits. The central government has more room to borrow — its debt to gdp ratio is still below 30 percent, which is low by international standards. So a central government stimulus, financed by bonds, is very possible. Luna: A key risk to watch is deflation. Producer prices have been falling for over a year now, and consumer price inflation is barely above zero. If people expect prices to keep falling, they'll delay purchases even further. Lucas: That's the Japanification risk that economists keep talking about. China doesn't want to end up like Japan in the 1990s, with a decade of stagnation and falling prices. So they need to act decisively. The question is whether they will. Luna: Do you think they will? Lucas: I think they'll do something, but probably not enough to get back to 5 percent. The leadership seems more comfortable with a slower growth rate as long as they can manage the transition to a more services-oriented, consumption-driven economy. The risk is that the transition happens too fast and leaves too many people behind. Luna: It's a high-stakes balancing act. And for investors, it means staying nimble and watching the data closely.