Chinese security monitors a checkpoint as the Communist Party’s Central Committee holds its third plenum meeting in Beijing, China, on July 15, 2024.
| Photo Credit: AP

China posted lower than expected growth in the second quarter on July 15, with all eyes on how top officials gathering for a key meeting in Beijing might seek to tackle the country’s deepening economic malaise.

The world’s second-largest economy is grappling with a real estate debt crisis, weakening consumption, and an ageing population.

Trade tensions with the United States and the European Union, which have sought to limit Beijing’s access to sensitive technology as well as putting up tariffs to protect their markets from cheap, subsidised Chinese goods, are also dragging growth down.

And on Monday, official statistics showed the economy grew by only 4.7% in the second quarter of the year. It represents the slowest rate of expansion since early 2023, when China was emerging from a crippling zero-COVID policy that strangled growth. Analysts polled by Bloomberg had expected 5.1%.

Retail sales — a key gauge of consumption — rose just two percent in June, down from 3.7% growth in May. “The external environment is intertwined and complex,” the National Bureau of Statistics said.

“Domestic effective demand remains insufficient and the foundation for sound economic recovery and growth still needs to be strengthened,” it added.

Party is planning “major” reforms: Xi

The figures came the same day that China’s ruling Communist Party kicked off a key meeting led by President Xi Jinping focussed on the economy, known as the ‘Third Plenum.’

The Chinese leader delivered a “work report” at the opening of the meeting, state news agency Xinhua said. He also “expounded on a draft decision of the CPC Central Committee on further comprehensively deepening reform and advancing Chinese modernisation”, it added. Beijing has offered few hints about what might be on the table.

Mr. Xi has said the party is planning “major” reforms. Analysts are hoping those pledges will result in badly needed support for the economy. “The four-day meeting of the country’s top governing body couldn’t come soon enough,” Harry Murphy Cruise, an economist at Moody’s Analytics, said in a note. But, he said, “while the case for reform is high, it’s unlikely to be a particularly exciting affair”.

“Instead, we expect a modest policy tweak that expands high-tech manufacturing and delivers a sprinkling of support to housing and households,” he added.

Meeting intended to long-term ideas and structural reforms

The People’s Daily, the Communist Party’s official newspaper, appeared to confirm lower expectations when it warned last week that “reform is not about changing direction and transformation is not about changing colour”.

Ting Lu, chief China economist at Nomura, said the meeting was “intended to generate and discuss big, long-term ideas and structural reforms instead of making short-term policy adjustments”.

The Third Plenum has previously been an occasion for the party’s top leadership to unveil major economic policy shifts.

In 1978, then-leader Deng Xiaoping used the meeting to announce market reforms that would put China on the path to dazzling economic growth by opening it to the world.

And more recently following the closed-door meeting in 2013, the leadership pledged to give the free market a “decisive” role in resource allocation, as well as other sweeping changes to economic and social policy.

Beijing aims for five percent growth this year

Beijing has said it is aiming for five percent growth this year — enviable for many Western countries but a far cry from the double-digit expansion that for years drove the Chinese economy.

But the economic uncertainty is also fuelling a vicious cycle that has kept consumption stubbornly low.

Among the most urgent issues facing the economy is the beleaguered property sector, which long served as a key engine for growth but is now mired in debt, with several top firms facing liquidation.

Authorities have moved in recent months to ease pressure on developers and restore confidence, including by encouraging local governments to buy up unsold homes.

Analysts say much more is required for a full rebound, as the country’s economy has yet to bounce back more than 18 months after damaging COVID-19 restrictions ended.

U.S. borrowers on lower incomes are increasingly struggling to keep up with their loan payments, according to recent data and bank executives, prompting banks to become more cautious about dishing out credit cards and car loans.

A growing number of Americans have seen their savings dwindle as rising prices squeeze budgets while interest rates stay high, bankers and economists said. The deterioration in household finances for those earning less than $45,000 contrasts with financial resilience among those on higher incomes.

Austan Goolsbee, Chicago Federal Reserve Bank President, said on April 19, that consumer delinquencies were one of the most concerning economic data points at the moment.

“If the delinquency rate of consumer loans starts rising, that is often a leading indicator things are about to get worse,” he said.

First-time and low-income borrowers are experiencing higher default rates on their loans than people with larger incomes, said Arijit Roy, who runs the consumer business at U.S. Bancorp .

At Bank of America, net charge-offs, or debts that are unlikely to be recovered, rose to $1.5 billion in the first quarter from $807 million a year earlier, mainly from credit cards, the bank reported on April 16. Rival JPMorgan Chase’s said its charge-offs nearly doubled to $2 billion in the same quarter, while they also increased at Citigroup and Wells Fargo.

Bank of America is seeing “cracks” in the finances of borrowers with below-prime credit scores whose household spending is affected by higher interest rates and inflation, Chief Financial Officer Alastair Borthwick told analysts on an earnings call.

But its customers typically have higher credit scores, and their finances are holding up well, he added.

Capital One, Old National Bank, and First Mortgage Direct are among the banks who serve more subprime customers with credit scores in the roughly 300 to 600 range, according to BankRate.

The lenders did not immediately respond to a request seeking comment.

While lenders earn money from interest payments, they seek to avoid situations in which customers fall so far behind on loans that they have to be written off.

“Banks are trying to come up with early-warning signals for customers about their bill payments, offering debt counseling and educating the customers more so that they can stay on track,” said Tom Dent, senior vice president at the Consumer Bankers Association, an industry group.

Lending caution

The burgeoning strains have prompted lenders to become more wary.

“During situations like these, many banks adopt a cautious outlook and begin to optimize their balance sheets by utilizing pricing strategies,” Mr. Roy said.

Loan volumes declined, and credit standards tightened further as banks raised borrowing costs in March, according to a survey from Federal Reserve Bank of Dallas. The poll focused on lenders headquartered in Dallas, Texas, but typically follows national trends.

Loan officers polled separately by the Federal Reserve also said they were tightening lending standards, including for credit cards and auto loans, according to a quarterly survey in January. A significant number of banks expected standards for credit cards to become even tougher.

The pullback signals loan growth — a key source of income — will be muted for conservative lenders, executives said.

Meanwhile, recent economic data have bolstered expectations that the Fed will not cut interest rates until September. The elevated borrowing costs could further exacerbate strains for stretched borrowers.

But banking giants said most consumers were in good shape.

JPMorgan CEO Jamie Dimon told analysts this month that Americans were still spending, although he noted those on lower incomes had largely used up their excess money.

“We are okay right now,” Dimon said. “It does not mean we’re okay down the road.”

Divergent consumers

Credit cards were the most notable area of weakness, while defaults on buy-now, pay-later loans were also rising, said Mark Zandi, chief economist at Moody’s Analytics.

“It is a tale of two consumers,” he said. “Back in the financial crisis, people were defaulting primarily on their mortgages but now it’s credit cards that are unsecured and have the highest rate of interest.”

Still, credit card and auto delinquency rates appear to be peaking, Moody’s said in a report earlier this month.

U.S. household debt has surged to an all-time high, and Americans have been borrowing more on credit cards, with balances crossing the $1 trillion mark for the first time last year.

Pandemic stimulus programs had burnished finances for many people who got credit cards, said Brendan Coughlin, head of consumer banking at Citizens Financial.

But financial buffers have shrunk as Americans burned through stimulus payments and loan forbearance programs ended, leaving many consumers overextended.

“Credit scores were artificially inflated with increased savings and lower spending,” said Mr. Coughlin. Credit card delinquencies are a key indicator to watch because they are “a representation of people living beyond their means,” he added.

Americans saved 3.6% of their disposable income in February, down from 4.7% a year earlier, according to U.S. Bureau of Economic Analysis data.

Overall consumer delinquencies stood at 0.98% in February across loan categories including credit cards, auto loans and mortgages, according to data from VantageScore, a credit score modeling company. It highlighted that the figure has been rising over the last few months.

Consumers on low incomes, which it defines as less than $45,000 a year, had greater financial stresses, and the group of U.S. borrowers with the highest credit scores is shrinking, the data showed.

Younger Americans are also more likely to be delinquent than the over-40s, the data showed.

Moody’s corporate headquarters in New York. File
| Photo Credit:
Reuters

Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.