It’s too soon to breathe easy on China’s economy

IS CHINA’S economic revival on track? A run of disappointing numbers suggests that additional stimulus may be needed – if officials can rally themselves to the task.

Optimism about growth, which was widespread in the opening months of the year, is diminishing. China is hemmed in by a two-speed economy, one in which exports excel while domestic drivers wilt.

This is the model, tied to global demand rather than local conditions, that Beijing was once keen to move away from. Unfortunately, it has a strong grip.

Consumers aren’t showing much appetite. Retail sales, which fell the most since the country’s reopening after the pandemic, turned in a particularly poor performance in May. They declined 0.6 per cent, three times the retreat that was anticipated.

A widely watched gauge of investment declined sharply and new home sales dipped. The latter was notable because there had been growing confidence that the worst of the real estate slump had passed. Any signs of recovery in housing were limited to the largest cities.

But should policy indulge such a loss of momentum? The central bank hasn’t sounded concerned, which is unwise. It is time to put a rate reduction on the agenda.

Pan Gongsheng, governor of the People’s Bank of China (PBOC), devoted a Jun 17 speech to explaining a revamp of the way it sets interest rates – without so much as hinting that a step to lower them was imminent. That was a missed opportunity.

On the Budget front, the government does not sound like it is in a mood to give the economy a boost. The fiscal deficit shrank in the first five months of 2026, an unusual development. Austerity, rather than stimulus, appears to be the order of the day.

That’s another mistake. While rates can be potent, they cannot accomplish everything. The economy gets a better lift when fiscal and monetary levers are used in conjunction. Or, at least, not fighting each other.

There is no doubt that the Chinese economy could use a lift, especially as prices are under control.

China has put a period of dangerously low inflation behind it, for now. But, with increases in consumer prices hovering around 1 per cent, a further boost to demand would do some good.

Confronted with a similar situation in 2003, former US Federal Reserve chief Alan Greenspan, who died on Monday (Jun 22), decided it was not good enough.

The Fed cut rates for the final time that cycle in June 2003, not because the economy was on the brink of a renewed downturn, but because he wanted to take out some insurance against an unwelcome further deterioration and deflation.

Potentially premature worries

If the goal is to simply meet growth targets unveiled by Chinese President Xi Jinping, then some of the worries today may be premature.

The country’s leaders lowered the bar for 2026 expansion to between 4.5 and 5 per cent – a sound accomplishment even if it is the least since 1991. By that measure, a strong first quarter, followed by a mediocre nine months, will get the government across the line.

Still, at least one adviser to the PBOC thinks that officials should be doing more. The export machine is impressive, but such a massive contribution from one sector is not sustainable.

The consumer is being relegated to a secondary role, which is not a recipe for long-term success. Rebalancing of the economy is a “crucial” task, remarked Huang Yiping, a member of the monetary policy committee.

But, it is easier said than done.

Reflecting on his last visit to China as Fed chair, in 2005, Greenspan marvelled at the scale of industrialisation. Foreign investors were rushing in. Western brands were competing with local shopkeepers for the attention of the ascendant middle class.

But, he observed in his memoir that the country’s leaders were very cautious. He doubted that they could easily step away from the template that had generated such a rapid rise in living standards.

Two decades on, exports remain a formidable engine. That appears to be sufficient for Beijing, for now. But it would be a mistake to derive too much comfort from the status quo. Every boom ends. BLOOMBERG