Dark clouds have gathered over China's economy in the second half of the year. Weak domestic demand, a slump in the real estate market, and deflation are showing little signs of improvement, and the manufacturing purchasing managers' index (PMI) released on the 31st indicated a contraction for the fourth consecutive month. The Chinese Communist Party held a Politburo meeting the previous day and presented its economic policy direction for the second half of the year, labeled 'progress amid stability,' leading the market to anticipate that the Chinese government will announce additional economic stimulus measures this second half.
According to the Chinese economic media Caixin, China's economy achieved a growth rate of 5.3% in the first half of this year. Following the announcement of economic indicators for the second quarter, major global financial institutions such as the International Monetary Fund (IMF), Swiss investment bank UBS, Morgan Stanley, and Nomura have revised their annual growth rate forecasts for China upward; however, they still fall short of the government target rate of '5%'.
This is because indicators that could gauge the Chinese economy are not signaling a recovery. The manufacturing purchasing managers' index (PMI), the first major economic indicator of the second half, fell below market expectations, continuing a contraction for four months. China's National Bureau of Statistics explained that the heat waves and heavy rain in July had an impact, but foreign media reported that companies, worried about tariffs from the United States, had rushed to secure volumes, resulting in a surge in exports for a while, which is now fading.
The factors pulling down the economy in the second half include not only external factors such as tariff risks from the United States but also internal factors such as ▲ a decline in the 'exchange' policy (subsidies for exchanging old products for new ones) ▲ delays in real estate recovery ▲ a recession in domestic investment ▲ and 'inner-quality competition' (内卷), among others.
In response, the meeting recognized the limitations of the existing durables-focused exchange policy and decided to shift the policy focus to expanding 'service' consumption. Previously, academia had pointed out that consumption-boosting policies centered on durables could run the risk of prematurely exhausting demand, indicating that domestic demand stimulation would depend on the extent to which service consumption, rather than durables, increases in the future. Accordingly, the government's consumption-boosting policy is expected to be strengthened around service consumption areas such as leisure, education, childcare, healthcare, and culture.
The meeting also emphasized the activation of private investment and the expansion of 'yangzhong' (两重), referring to large-scale construction projects led by the government. Additionally, the policy financial tools mentioned in the meeting last April, amounting to 500 billion yuan (approximately 97 trillion won), are expected to be implemented in the second half. The usage will be limited to eight strategic areas including the digital economy, artificial intelligence (AI), low-altitude economics, and consumption.
Although the meeting did not directly mention the term 'inner-quality competition,' it noted that 'unruly competition among corporations must be managed according to laws and regulations, the excess production capacity of key industries needs to be adjusted, and local reckless investment attraction behaviors should be regulated,' thereby clearly indicating an anti-inner-quality competition policy direction.
Finally, the meeting presented 'the four stabilizations' goals: ▲ employment stabilization ▲ corporate stabilization ▲ market stabilization ▲ and stability of expectations, stating that 'if necessary, additional measures will be taken in a timely manner to achieve these goals.' According to Caixin, institutions like UBS believe that additional stimulus measures could be introduced around the end of the third quarter to the beginning of the fourth quarter, and these policies are expected to play a role in 'supporting the floor' rather than being radical policies to boost the economy in the short term.