June data hits confidence

Policymakers are struggling to lift sentiment and thereby boost consumption

• In April, economic activity hit a cyclical peak, and broad-based momentum loss has since persisted. Indeed, Q2:23 GDP growth undershot expectations, placing the Party’s growth target potentially out of reach. Further policy support would be required to ensure that macroeconomic data doesn’t deteriorate much further still.
• Some additional support in the traditional stimulus areas, such as infrastructure, is plausible. We’d foresee an additional quota of SPBs. However, the consistent calls for more forceful and direct support for domestic demand imply that support will attempt to target household and business sentiment.
• Household consumption has proven the most disappointing; it was expected to take over the baton from front-loaded infrastructure investment in H2:23 — and drive the recovery. However, a further hit to both consumer and business confidence from the macroeconomic data in June (and, overall, in Q2:23) won’t help. 
• Consumption is being weighed down by weak confidence, stagnant income growth, and high unemployment. The government is aware that more needs to be done. Yet, most initiatives orbit around consumption vouchers to low- and middle-income households and subsidies for certain products, which are most likely to cannibalise consumption of other items, and reducing firms’ real funding costs, which fail to transfer income and wealth to households.
• Still, longer term, the plan is to adjust hukou policies and build a more robust social security system that would provide better and more generous coverage.
• Meantime, the lack of concrete policy announcements implies Beijing as struggling to find policy initiatives that would forcefully stimulate consumption. Clearly, as H1:23 has demonstrated, boosting consumer confidence to stimulate household spending is less straightforward than, for example, state-led investment in infrastructure.
• Sentiment, alongside the behaviour it triggers, is guided by hundreds of millions of people, resting on a complex knot of human factors, which confounds linear predictions.
• Worse still for Beijing’s macroeconomic planners, events and struggles this year offer a glimpse into a more difficult future as, every year, with a larger part of China’s economy likely driven by forces outside direct control, it would gradually erode the ability of the Party, and its institutions, to determine outcomes.