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(Bloomberg) — Back in January, Premier Li Qiang trumpeted China\u2019s success in exceeding its 2023 growth goal without resorting to \u201cmassive stimulus.\u201d Repeating the same feat this year now looks less likely.<\/p>\n
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Pressure is growing on Chinese authorities to quickly ramp up fiscal and monetary stimulus to hit this year\u2019s growth target of around 5%. Data published Saturday showed industrial output marking its longest slowing streak since 2021 last month, while consumption and investment weakened more than expected.<\/p>\n
Hours before the release, the People\u2019s Bank of China signaled in a rare statement alongside disappointing credit data that fighting deflation would become a higher priority, and indicated more monetary easing ahead.<\/p>\n
\u201cThis set of data calls for aggressive fiscal expansion to change expectations and to rejuvenate confidence in the economy,\u201d Hao Hong, chief economist at Grow Investment Group, wrote on social media platform X. \u201cOtherwise we would be sleepwalking to a deepening gloom.\u201d<\/p>\n
The deterioration is testing President Xi Jinping\u2019s tolerance for missing a high-profile target, as he balances growth with avoiding the big stimulus that fueled previous boom-and-bust cycles. Failure to achieve the goal could further undermine confidence in the world\u2019s No. 2 economy, with foreign investors already pulling a record amount of money from China in the second quarter.<\/p>\n
August\u2019s data bolstered evidence that the Chinese economy has weakened since growth in gross domestic product slowed to 4.7% in the three months ending June. That was the worst pace in five quarters, and \u2014 crucially \u2014 below Beijing\u2019s annual target of around 5%.<\/p>\n
The focus is now on October\u2019s third quarter reading. Data so far suggests GDP will expand at 4.6%-4.7% for the period, BNP Paribas SA\u2019s chief China economist Jacqueline Rong estimates.<\/p>\n
Analysts at Macquarie Group Ltd. including Larry Hu expect full-year growth to come in at that level if the current momentum continues into the December period, \u201cmissing the target of around 5%.\u201d Economists at Wall Street banks including Goldman Sachs Group Inc. cut their full-year GDP forecasts in the wake of the miserable data, all to below the official goal.<\/p>\n
That would mark the second time in three years that China failed to hit its target. Covid lockdowns in 2022 led to the biggest miss since the government began setting GDP targets in the early 1990s.<\/p>\n
President Xi last week appeared to signal tolerance for a rate slightly lower than 5%, when he urged officials to implement existing policies to \u201cstrive to achieve\u201d the full-year goals. That language seemed less forceful than a July call to \u201cresolutely\u201d meet the objectives.<\/p>\n
\u201cHe was avoiding putting too much pressure on the officials to hit 5% growth,\u201d said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. \u201cAs long as they implement policies faithfully, a growth rate eventually slightly lower than 5% would be acceptable, I think.\u201d<\/p>\n
Xi made the remarks at a gathering of some Communist Party chiefs held in the country\u2019s northwestern Gansu, which is among the 12 provinces deemed by the central government to have an alarmingly high amount of debt.<\/p>\n
Once a key driver of growth, provinces have turned more reluctant to spend. Their issuance of new special bonds in the first eight months of the year was at the slowest pace since 2021. That left local officials with about 1.4 trillion yuan ($197 billion) in this year\u2019s quota still to tap, according to data compiled by Bloomberg.<\/p>\n
While the central government could step in and repeat last year\u2019s rare ad hoc budget revision to unleash more spending, time is running out to rescue the 2024 target. Analysts are forecasting further rate cuts and a reduction to the amount of cash lenders must keep in reserve, with September seen as a window.<\/p>\n
\u201cEven if additional stimulus is introduced today, the impact on the full year growth may be limited,\u201d Ding added. \u201cMy take is that leaders may be coming to terms with the reality that there\u2019s only about one quarter left for this year.\u201d<\/p>\n
Part of the problem is the ongoing property slump that Barclays Plc calculates has caused Chinese households to lose some $18 trillion in wealth. Real estate investment contracted in the double digits in August, according to estimates by Nomura Holdings Inc. economists including Lu Ting.<\/p>\n
Deflation is also becoming more entrenched. Underscoring the risks, private investment fell in the first eight months of the year, as companies locked in price wars struggled to make a profit.<\/p>\n
The PBOC on Friday echoed a pledge by Governor Pan Gongsheng in June to make \u201cmaintaining price stability and pushing for the mild rebound in prices an important consideration.\u201d However, it did not repeat Pan\u2019s comment of \u201ckeeping policy restraint\u201d or avoiding drastic measures.<\/p>\n
\u201cThe central bank may have made fighting deflation a higher priority,\u201d said BNP\u2019s Rong. Policies may \u201cpivot more\u201d toward encouraging household spending, as the PBOC also put emphasis on consumption and investment, she added.<\/p>\n
Still, as bad as the data looks, policymakers will likely hold off aggressive stimulus while the economy broadly holds up. Exports last month hit their highest value in nearly two years, even as China faces a rising tide of tariffs from the US and European Union.<\/p>\n
\u201cIt is unlikely that China\u2019s senior policymakers don\u2019t care about growth anymore,\u201d said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. \u201cBut it is hard to know how weak the economy needs to get before they will agree to a more expansionary fiscal policy.\u201d<\/p>\n
(Updates with banks downgrading GDP forecasts.)<\/p>\n
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