By Kevin Yao and Ellen Zhang

BEIJING (Reuters) – Economic Pressures Mount in China

Another round of disappointing economic figures from China is prompting calls for Beijing to further loosen fiscal policies and consider distributing shopping vouchers to drive growth towards this year’s target of approximately 5%.

After a lackluster second quarter, the world’s second-largest economy experienced worsening conditions in July. Key indicators showed new home prices falling at the fastest rate in nine years, while industrial output, export, and investment growth decreased, and unemployment rates rose.

While some data exceeded forecasts, the reasons were not encouraging: inflation was primarily due to adverse weather rather than increased domestic demand, a surge in imports was linked to pre-emptive chip purchases ahead of anticipated U.S. technology restrictions, and a modest uptick in retail sales was influenced by low comparisons from 2023.

The overall economic situation raises concerns for policymakers, who may be forced to implement more stimulus unless they are prepared to accept slower growth accompanied by declining consumer and business confidence.

Carlos Casanova, Asia senior economist at UBP, noted, “The current economic performance remains behind target, necessitating immediate and significant policy intervention.” He suggested that the government might need to expand the budget deficit to 4% of GDP from the current target of 3%.

A policy advisor indicated that if growth does not show signs of improvement during the summer, Beijing may opt to accelerate the issuance of next year’s bond quota in October. The advisor warned that without such measures, the economy could face severe challenges, making the 5% target unattainable.

Similar steps were taken last October, when China raised its budget deficit from 3.0% to 3.8% of GDP and expedited parts of the 2024 local government debt quotas to invest in infrastructure and flood prevention.

What distinguishes this year’s strategy is the potential shift in spending priorities. After years of expansive infrastructure development yielding diminishing returns, concerns over trade tensions and industrial overcapacity have put pressure on advanced manufacturing, China’s traditional growth engine.

Analysts from Societe Generale emphasized that, given its scale, the Chinese economy cannot solely rely on manufacturing and exports. They suggested that to achieve the 5% growth target, policymakers should enhance efforts to stimulate domestic demand.

Voucher Discussions Resurface

With consumers being more cautious with their spending, major Chinese e-commerce companies are resorting to heavy discounts and promotions, which is affecting profit margins across the retail sector. For instance, Alibaba Group Holding fell short of market revenue expectations amid pressure from subdued domestic e-commerce sales.

In a policy meeting in July, officials indicated a shift towards consumer stimulus, signaling recognition that previous measures were ineffective. Recently, state media suggested that the government should contemplate providing at least 1 trillion yuan (about $139 billion) in direct consumer support—either as cash or vouchers.

This amount is approximately 0.8% of last year’s GDP. The article emphasized that such an initiative would require increasing this year’s deficit ratio or approving additional special treasury bonds. Economists cited in the article proposed issuing consumption coupons during the National Day holiday in October.

Despite this, many economists are doubtful that the government will follow through, given prior hesitance towards direct consumer support, instead favoring business relief during the pandemic. Xing Zhaopeng, a senior strategist at ANZ, remarked that vouchers would provide a temporary boost, but sustainable consumption growth would depend on recovering property and stock markets. He noted that household property wealth had significantly declined—by 20%-30% from a peak of 600 trillion yuan—equaling China’s annual economic output.

“People will spend during the month they get the vouchers,” Xing commented. “Only property and stock prices will generate consistent consumer spending momentum.”