China’s GDP Miss Signals Urgent Need for Accelerated Fiscal Spending

News Summary: China's GDP growth fell sharply to 4.7% year-on-year in the second quarter, raising concerns about meeting its annual growth target and prompting calls for faster fiscal measures.

　　Lead: Chinas economy accelerated at a disappointing pace of 4.7% year-on-year in the second quarter of 2023, down from 5.3% in the first quarter, as experts warn that the country's annual growth target of 5% is at risk due to a combination of declining domestic demand and rising trade tensions, necessitating urgent fiscal spending, according to Standard Chartered economist Hunter Chan.

　　Main Body:

　　In a significant downturn, China's GDP growth fell sharply to 4.7% year-on-year in Q2 2023, missing market expectations of 5.1% and marking a decline from the 5.3% recorded in the previous quarter. Standard Chartered's latest report indicates that the nominal GDP growth rate was even more concerning, expanding by just 4.0% year-on-year. The report highlights the deflationary pressures contributing to these weak figures.

　　“GDP growth decelerated in Q2, confirming PMI and other data that had signaled a slowdown, and with nominal GDP growth faltering, the annual growth target of 5% appears increasingly out of reach,” Chan stated.

　　June data presented a mixed picture: industrial production grew a robust 5.3% year-on-year, but retail sales and services production saw a slowdown, recording growth rates of only 2% and 4.7% year-on-year, respectively. In contrast, property investment continued its downward trend, contracting by nearly 10% year-on-year.

　　The lack of robust domestic demand was underscored by the continued pressure on Chinas export outlook, which is clouded by rising trade tensions, particularly with the United States and European Union, who recently imposed tariffs on Chinese electric vehicles. The environment suggests a potential escalation in tariff measures following the upcoming United States elections in November.

　　Chan noted that, “Supply continued to outperform domestic demand,” an observation that is leading to increasing pressure on Chinas policymakers to introduce concrete measures aimed at boosting domestic consumption.

　　With monetary policy options constrained, Standard Chartered suggests that fiscal and housing policies will need to take the lead in invigorating growth. Chan anticipates a series of rate cuts and reductions in the reserve requirement ratio (RRR) as clearer cut prospects for the Federal Reserve's interest rate cuts emerge, stating, “We expect a 10 basis point cut in the policy rate for both Q3 and Q4, along with a 25 basis point cut in the RRR in Q3.”

　　In anticipation of the politburos late July meeting, experts are calling for immediate measures to stimulate domestic demand. “Ramp up fiscal spending by fully utilizing bond issuance proceeds and reducing housing inventory are likely to be top of the policy agenda,” Chan added.

　　The prolonged period of economic adjustment indicates that China‘s growth drivers remain uneven. June’s industrial production results reflect a resilient manufacturing sector, but the retail market illustrates the consumer hesitation facing the economy—reflecting global uncertainties, including potential tariffs and ongoing geopolitical tensions.

　　Given these developments, there is a growing urgency for China‘s government to adopt an aggressive fiscal stance to mitigate the potential economic fallout and ensure that growth targets are met. As economic conditions evolve, stakeholders in China’s financial infrastructure will need to align closely with these fiscal strategies to stabilize growth.

　　Conclusion:

　　The significant economic challenges highlighted by the recent decline in GDP growth underscore the necessity for proactive fiscal policies in China. Analysts expect the upcoming politburo meeting will produce strategies aimed at revitalizing consumer spending and enhancing the overall economic framework. As the situation develops, foreign exchange investors and stakeholders should closely monitor policy changes that could impact the fiscal landscape in one of the world's largest economies.

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