China is slowing fast, and the government is taking only modest steps to try to keep the earth’s second-largest economy from outright contraction.
Why it matters: While it lags behind the US in size, China’s economy has been the largest source of growth for global GDP for much of the last two-plus decades — meaning it’s a global engine of corporate profitability, investment activity, and demand for commodities.
Driving the news: A raft of disappointing economic updates this week showed Chinese growth still sputtering on multiple fronts.
- Its industrial sector slowed again. Industrial production rose just 3.8% in July compared to the previous year — and well short of expectations for 4.5%.
- The crisis in China’s housing sector continues to hurt. Fixed investment — of which housing is an important component — was up just 5.7% in the first seven months of the year, compared to the same period in 2021. (In 2021, that figure was 10.3% higher year over year as of July. )
- Consumers aren’t picking up the slack either. Retail sales in July were up a scant 2.7% year over year, far short of the 5% expectation.
Context: In the recent past, when faced with a slowdown, Chinese policymakers quickly turned to tried-and-true tools to attempt to give growth a kick in the pants. They included…
- Pouring money into public infrastructure investment.
- Engineering a borrowing boom to fuel domestic spending.
- Delivering sharp interest rate cuts.
The plot: Despite China’s current economic blahs, there is little indication that the government is decisively trying to prop up growth.
- In past slowdowns, China’s broadest measure of all types of credit to the economy — known as “total social financing” — has surged, a sign the government was keen to boost debt to offset slumps.
- A report on Friday showed total social financing far lower than expected, as the government seems disinclined to use a debt-driven boom as a source of growth.
Yes, but: The People’s Bank of China did cut interest rates by a tiny one-tenth of a percentage point on Monday — a move most analysts think is modest, and unlikely to reinvigorate economic activity.
The bottom line: The ruling Chinese Communist Party knows that the breakneck pace of Chinese economic growth that prevailed in past decades is unlikely to be matched. But unlike in past decades, they don’t seem particularly worried about it.
- For the rest of the world, that may mean China will be less of a reliable engine of growth in the coming years.