China’s Economic Slowdown: A Symptom of Broader Structural Issues?

China’s economic slowdown has deepened in July, with retail sales barely growing and investment contracting at an alarming rate. While Beijing may meet its growth target range for the year, underlying trends suggest a more profound malaise.

The collapse in consumer spending power is striking. China’s retail sales growth slowed sharply over the past year, easing to 1.3% in the first half of this year from 5% in the same period last year. Goldman Sachs notes that “real momentum was likely even weaker given higher CPI inflation.” The government’s trade-in subsidy program has become a drag on purchases.

China relies heavily on domestic demand to drive growth, and the slowdown is all the more concerning given this reliance. Exports remain a rare bright spot, driven by global demand for technology and offsetting headwinds from the Middle East conflict. However, imports climbed 27.5% in July, beating estimates, indicating that China’s trade surplus will continue to be a source of tension with its trading partners.

The property sector is a major contributor to these numbers. The prolonged downturn has depressed consumption and investment, as local governments’ borrowing constraints have hampered one of China’s traditional growth drivers. Urban fixed-asset investment contracted 6.7% this year as of end-July from a year earlier, worse than the estimated 6% decline.

The jobs picture may be even worse than official figures suggest. A private survey conducted by Li Daokui and his team at Tsinghua University showed China’s broad unemployment rate at 10.2% as of July, significantly higher than the official figure of around 5%. This is particularly concerning given that more than half of the roughly 24 million long-term unemployed are aged 16 to 25.

Given these trends, Beijing will need to do more to support its economy in the second half of the year. A substantial expansion in government borrowing may be necessary to boost investment and consumption. However, this raises questions about China’s debt sustainability and the risks of a fiscal crisis down the line.

As Beijing addresses these challenges, it would benefit from looking beyond its own borders for solutions. The global economy faces its own structural issues, including supply chain disruptions and rising protectionism. In this context, China’s slowdown should be seen as part of a broader economic malaise that requires coordinated international action.

The stakes are high, and the world will be watching Beijing’s next moves closely. Will it opt for more stimulus, or will it continue to rely on exports to drive growth? The answer will have far-reaching implications not just for China’s economy but for the global economy as a whole.