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China’s Q3 GDP Slows to Weakest Pace Since Early 2023, Prompting Calls for More Stimulus

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China’s economy grew at its slowest pace since early 2023 in the third quarter, as the country’s ongoing property sector crisis continues to hamper growth. Although consumption and factory output exceeded expectations in September, the real estate downturn remains a significant challenge. Beijing has introduced several stimulus measures, but markets are still waiting for more clarity on the scope of these interventions and how they will support long-term growth.

In the July-September period, China’s GDP expanded by 4.6%, slightly above the forecast of 4.5% but below the 4.7% growth seen in the second quarter. Bruce Pang, Chief Economist at JLL, noted that this performance was largely expected, citing weak domestic demand, a struggling housing market, and sluggish export growth as key factors behind the slowdown. He emphasized that the effects of the late September stimulus package will take time to materialize and bolster growth in the coming quarters.

Despite these challenges, Chinese officials expressed confidence in achieving the government’s annual growth target of around 5%. Sheng Laiyun, deputy head of China’s statistics bureau, stated during a post-data press conference that further policy support, including a reduction in banks’ reserve requirements, would help sustain the economic recovery. He predicted continued stabilization in the fourth quarter, underpinned by improved consumption and industrial output figures.

While industrial output and retail sales data for September beat forecasts, the property sector remains a sore spot. Betty Wang, an economist at Oxford Economics, downplayed the significance of the better-than-expected September numbers, noting that structural issues in the real estate and household sectors persist. She warned that while the recent stimulus measures may cushion downside risks to 2024 growth, they are unlikely to reverse the broader structural downturn.

A Reuters poll suggests China’s economy will expand by 4.8% in 2024, below Beijing’s target, with growth slowing further to 4.5% in 2025.

PROPERTY SECTOR WOES

On a quarter-to-quarter basis, the economy grew by 0.9% in Q3, up from a revised 0.5% in Q2, but below the forecast of 1.0%. The weakness of the property sector remains a central concern, as real estate accounts for 70% of Chinese household wealth and once contributed up to a quarter of the country’s economy. Consumers, wary of the property market’s instability, have cut back on spending, negatively impacting businesses dependent on robust domestic demand. For example, eyewear maker EssilorLuxottica, which produces Ray-Ban and Oakley brands, reported missing revenue targets in Q3 due to weak Chinese consumer demand.

Further compounding worries, new home prices in China fell at the fastest rate since 2015 in September, indicating that the property market remains in crisis despite multiple rounds of policy support over the past year. Additionally, China’s crude steel output fell for the fourth consecutive month, reflecting sluggish demand for construction materials.

While the export sector has been a rare bright spot for China’s economy, growth in exports slowed sharply in September, raising concerns about the sector’s future performance.

DEFLATIONARY PRESSURES AND POLICY RESPONSE

Following the release of the Q3 data, China’s stock markets were volatile but eventually rallied. The blue-chip CSI300 Index rose by 2.5%, and the Shanghai Composite gained 2.0%, boosted by new central bank funding schemes aimed at supporting the equity market. However, some economists believe China is grappling with deflationary pressures, which have persisted since early 2023. Toru Nishihama, Chief Economist at Dai-Ichi Life Research Institute, warned that China faces excess supply and weak demand, suggesting the country may fall into full-fledged deflation.

Policymakers have pledged to shift from relying on infrastructure and manufacturing investments to focus on stimulating domestic consumption. The central bank rolled out aggressive monetary support in late September, the most substantial measures since the COVID-19 pandemic, to bolster the property and stock markets. However, markets remain skeptical, as details about the total size of the stimulus package and the government’s long-term growth strategy remain unclear.

China faces structural challenges, including overcapacity, high debt levels, and an ageing population. Nishihama stressed that while the government has introduced numerous stimulus measures, it has yet to address these fundamental problems, leaving markets uncertain about the future trajectory of China’s economic recovery.

 

Calls for China to Stimulate Growth Intensify Amid Economic Challenges

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Economists are increasingly advocating for China to implement stimulus measures to boost its economic growth, with calls coming from within the country. Liu Shijin, a former deputy head of China’s Development Research Center, has proposed that China issue at least 10 trillion yuan ($1.42 trillion) in ultra-long government bonds over the next year or two to invest in human capital. In a presentation at Renmin University’s China Macroeconomy Forum, Liu emphasized that China should avoid copying the stimulus strategies of developed nations, such as cutting interest rates, as it has not yet reached that level of economic deceleration.

China’s recovery following the COVID-19 pandemic has been slower than expected, with ongoing challenges such as a real estate slump and low consumer confidence. Manufacturing growth has also decelerated, and major financial institutions like Goldman Sachs have lowered their 2024 growth forecasts for China. Goldman Sachs cut its growth estimate to 4.7%, citing weaker-than-expected data and the delayed impact of fiscal policies.

Despite Beijing’s efforts to address economic concerns, such as targeted subsidies for consumer goods, the effects have been limited. Retail sales in August saw minimal growth, rising only 2.1% year-on-year, one of the slowest rates since the post-pandemic recovery. Meanwhile, the ongoing real estate slump, which once accounted for over a quarter of the Chinese economy, remains a significant drag on growth.

Economist Xu Gao of Bank of China International highlighted the real estate market as a key issue, pointing out that consumer demand exists, but concerns over property developers failing to complete pre-sold units have deterred homebuyers. Xu urged the government to take more robust measures, including bailing out property owners, to stabilize the housing market.

While China’s leadership has prioritized advanced manufacturing and technological development in the face of U.S. restrictions, experts argue that the country needs to focus on fiscal reforms to address immediate economic challenges. Former People’s Bank of China governor Yi Gang recently called for proactive fiscal policy to combat deflationary pressure. However, Yi’s influence on current economic policy is limited, as noted by Gabriel Wildau, managing director at consulting firm Teneo.

China’s economic data from the first half of 2024 showed 5% growth, but local governments are facing fiscal constraints, limiting the effectiveness of infrastructure investment. Ting Lu, Nomura’s Chief China Economist, warned of potential secondary shocks to the economy, suggesting that fiscal policies and reforms should take precedence over monetary policies. Lu also advocated for direct government intervention to stabilize the property market and support local governments struggling under tight financial conditions.

Despite these challenges, some officials remain optimistic. Former vice finance minister Zhu Guangyao expressed confidence that China could achieve its 2024 growth target of around 5%, with long-term GDP growth projected to remain between 4% and 5% annually over the next decade.