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China economy
OpinionComment
Yukon Huang
Yukon Huang

The View | Slowing growth shows China’s old playbook of property and infrastructure investment needs an update

  • Beijing hopes its recent expansionary policies will lead to a rapid recovery, but the original 2022 growth target is no longer viable
  • Rather than more stimulus, the government needs to ease controls over resources that have created long-term declines in investment productivity

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Residential buildings under construction in Guangzhou on July 18. Infrastructure investment is a central part of China’s attempt to revive slowing growth, but returns on that investment are not as good as in previous decades. Photo: AFP
Yukon Huang
China’s second-quarter economic data confirmed the worst fears of market watchers. GDP grew by only 0.4 per cent in the second quarter year on year and shrank by 2.6 per cent compared to the first quarter, according to the National Bureau of Statistics. The reported second-quarter growth was well below the consensus forecast of 1.2 per cent.

Official commentary tended to paint a more positive picture, with headlines such as “China’s economy achieves positive growth in Q2 despite downward pressure” and noting that growth amounted to 2.5 per cent for the first half of 2022. External media coverage was more sobering, with headlines such as “Growth plunges to 0.4 per cent, lowest in two years after missing expectations”.

The reality is more complex, with uncertainty clouding forecasts for the remainder of the year and beyond. Beijing hopes that recent expansionary policies will lead to a rapid recovery, but the original 2022 target growth rate of “around 5.5 per cent” is no longer viable. What is needed now is a major revamp of the state’s tight controls over the use of resources, which has resulted in a long-term decline in the productivity of investment.
The external growth environment has deteriorated amid slackening demand in the West, rising inflation and the Ukraine crisis. Internally, China’s troubled property market, unresolved mortgage financing issues and “zero-Covid” policies have damaged growth prospects. Unemployment has become politically sensitive, and household spending remains tepid.
But some indicators suggest the economic decline has bottomed out. The uptick in local government investment and retail sales in June marks a break from the sharp contraction induced by the Shanghai and Beijing lockdowns in April and May.

Robust demand from the US continues to drive growth in exports. The labour market appears to be recovering, with the unemployment rate declining to 5.5 per cent in June after peaking at 6.1 per cent in April.

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