China's quarterly report card is in, and it's bad — but Beijing is unlikely to step in and prop up the economy just yet

China's economic rebound from the COVID-19 pandemic has fizzled.

Costfoto/NurPhoto/Getty Images

• China posted GDP growth of 6.3% in the second quarter of 2023, badly missing expectations.
• The GDP print was off a low base in 2022 and up just 0.8% on-quarter.
• Even so, China is unlikely to unleash major stimulus measures to boost the economy because it's already in so much debt.

The world's second-largest economy is in trouble, but analysts say Beijing is unlikely to step in with a massive stimulus just yet.

China has been reporting disappointing data in the last few months after a post-COVID growth spurt slowed. On Monday, China said its GDP grew by 6.3% in the second quarter from a year ago — a big miss from the 7.3% economists polled by Reuters had forecast.

And while the GDP did grow year-on-year, it bears noting that the comparison is with a low base from last year when China's economy was battered by on-off COVID-19 restrictions.  

All these troubles have forced a discussion on a potential stimulus package from the government. "There are growing hopes for 'big bang' stimulus to fire up China's growth," Vishnu Varathan, the head of economics and strategy at Mizuho Bank, wrote in a Monday note before China's second-quarter GDP release.

But any shot in the arm is likely to be limited and targeted, other analysts say.

For starters, China has already signaled that while it would roll out more policy support for the economy, it wouldn't be overly aggressive with the measures.

In March, the Chinese central bank already cut the reserve requirement ratio — the amount of cash banks need to hold as reserves —  and shaved its benchmark lending rates by 0.1 percentage point in June.

"The policy measures launched in the early stage are taking effect, and we must be patient and confident in the sustained and stable economic growth," Liu Guoqiang, the deputy governor of the Chinese central bank told reporters on Friday, according to Insider's translation of the official transcript.

In the past, China has tried to stimulate domestic demand on a large scale — usually with infrastructure and housing project developments.

But this has contributed to the already massive debt levels in the country's economy — China's total debt to GDP ratio already hit a record high of nearly 300% in the first quarter of the year, according to a May 8 Bloomberg analysis based on official data.

The inherent risk with such high debt levels is that a default threatens a domino impact on the Chinese economy — and even the world.

"There are a lot of expectations on the Chinese government to have more stimulus policies. I don't think this is real,"  Zhu Min, a former deputy managing director of the International Monetary Fund said at the World Economic Forum's "Summer Davos" in Tianjin, China, on June 29, per Bloomberg. 

Robert Carnell, ING's head of research for Asia Pacific wrote in a July 6 note that China is already a "debt-fueled sector in an economy which is already sitting on large amounts of debt."

"Allowing this sector's weakness to run its course may hurt growth now, but this is probably viewed as a price worth paying for more sustainable crisis-free growth ahead," Carnell added.

All this just means investors will have to sit tight for the ride ahead and not hold out for a quick rebound.

That's because Beijing may not even hit the 5% GDP growth target it has set for itself this year even as they roll out support measures to stimulate the economy, Nomura economists wrote in a Monday note seen by Insider.

"We believe markets should curb their expectations for a fast, cure-all package and instead embrace expectations of a growth slowdown to below 4.0% in 2024," the economists added.

Read the original article on Business Insider

from Business Insider https://ift.tt/CVRyHT3