China’s economic growth slowed in the second quarter as weak domestic demand and falling investment weighed on the world’s second-largest economy….reports Asian Lite News Desk
China’s economy lost momentum in the second quarter of the year, with gross domestic product (GDP) growth slowing to 4.3 per cent as weak domestic demand and declining investment exposed deepening structural imbalances in the country’s export-led growth model.
According to an analysis published by the Mercator Institute for China Studies (MERICS), the biggest drag on economic growth was a sharp decline in fixed-asset investment (FAI), reflecting mounting financial pressures across key sectors.
The report said real estate investment fell by 18 per cent during the first half of the year, marking the steepest contraction recorded over a six-month period. Investment also declined in road construction, education, healthcare and other infrastructure projects.
“The main factor dragging down GDP growth was nosediving fixed-asset investment (FAI). Real estate investment dropped by 18.0 per cent, the largest contraction for a half-year on record. But FAI also fell in road building, education, healthcare, and construction. This suggests the funds of already cash-strapped local governments, which would normally shoulder a hefty share of infrastructure spending, have dried up,” the MERICS analysis said.
The report noted that China’s domestic economic weaknesses have become increasingly pronounced, with consumer demand remaining subdued.
Domestic car sales fell by 16.1 per cent year-on-year in June, highlighting weak consumer confidence and adding further pressure on overall economic growth.
Despite sluggish domestic activity, China’s external trade remained robust. Exports rose by 27 per cent in June, while imports increased by 36 per cent in value terms, driven in part by higher commodity and high-tech product prices.
High-tech exports continued to perform strongly, suggesting that China’s export sector still has significant room for expansion even as domestic demand weakens.
However, the report warned that growing dependence on exports is likely to intensify trade tensions with the European Union.
While export volumes have increased significantly, import volumes have remained largely unchanged, indicating that China is paying more for imported goods rather than purchasing greater quantities.
According to the analysis, Beijing’s reliance on exports leaves little room for compromise in trade negotiations with the EU.
The report noted that the influx of Chinese goods into European markets has prompted the EU to review its trade defence measures. It added that Germany has also adopted a firmer stance on what it views as distortions created by China’s industrial policies and unfair trade practices.
However, the report suggested that European policymakers should not expect major concessions from Beijing on trade and investment, arguing that domestic economic pressures are likely to make the Chinese government more resistant to policy changes.
MERICS said China will need to achieve at least moderate growth in domestic consumption and investment to avoid a broader economic slowdown and meet its growth targets.
The analysis, however, argued that significant measures to boost household spending are unlikely in the near term, as meaningful increases in consumption would require difficult structural reforms whose benefits would take years to materialise.
