China's Recovery Stalls, But Outlook Risks Are Well Contained

MacroMicro’s China Economic Cycle Clock remained in the second quadrant in August, which suggests GDP growth slowed relative to July. Softer growth prospects were mainly driven by ongoing property market woes and economic data falling short of market expectations.

Property market slump still amplifying financial risks and curbing household consumption

China's housing market unexpectedly deteriorated in July, with the housing market sentiment index declining to a multi-year low of 93.8. Commercial home sales dropped 1.5% in July, after expanding 1.1% in June, while real estate investment plummeted at a faster rate of 8.5% in July. Weak housing demand is limiting property developers’ ability to service debt, which coupled with a lack of new development projects, has led to a series of bond defaults and other financial product failures in recent weeks. In terms of household consumption, declining home prices are taking its toll on residents’ net wealth and purchasing intentions. Moreover, a depressed construction sector has contributed to a rise in the urban unemployment rate to 5.3% in July. Consequently, retail sales growth came in at 2.5% in July, far below market expectations of 4.5% and the worst reading since January 2023, while industrial production—a key growth engine of the Chinese economy—remains fragile.

Policy makers scramble to bolster an ailing economy

As the economy struggles to find any sustained momentum and financial risks continue to mount, the government unveiled several measures to ensure ample liquidity, restore economic confidence, and stimulate housing demand. On the heels of the economic data dump in mid-August, the People's Bank of China caught markets off guard by lowering its three main policy rates. Subsequently, the one-year Loan Prime Rate (LPR) was cut to 3.45% from 3.55%. In addition, a new round of liquidity injections using reverse repos was made available.

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