China’s Rebound Falters, Tripped Up by Debt and Weak Exports

Because of the huge impact of the closure of Shanghai, which has 25 million people, comparing this spring and last spring provides “a misleading picture of China’s economic performance,” said Diana Choyleva, the chief economist at Enodo Economics in London.

Instead, analysts said, a more accurate measure of the economy emerges by comparing the second quarter of 2023 with the previous three months, after the “zero Covid” policy was scrapped.

And by that measure, output was only 0.8 percent higher in the second quarter than the first quarter. When projected out for an entire year, that is a growth rate of a little over 3 percent a year, down from about 9 percent in the first quarter.

China’s economy is flashing many warning signs.

Exports plunged, particularly in June. Weak spending is pushing China close to a dangerous trend known as deflation: Consumer prices are flat, and wholesale prices paid by companies are actually falling.

Housing prices have been slipping in smaller cities, and that decline spread to big cities in June. It was a further blow to the country’s real estate development and construction industries, which make up at least a quarter of the economy and have already been shaken by dozens of defaults on bonds issued outside of China.

Data released by the National Bureau of Statistics on Saturday showed that its 70-city index of housing prices fell at an annual rate of 2.2 percent in June, after eroding at an annual rate of only 0.2 percent in May.

Investment has stumbled, with foreign companies in particular showing little appetite for putting more money into China. Local governments are short of cash. Baoding, a city of 12 million people in north-central China, had to suspend most bus service last week.

“It’s not a strong recovery; the economy is quite weak,” said Wang Dan, the chief economist at Hang Seng Bank China.

Signs of further economic troubles persist. The National Bureau of Statistics said on Monday that industrial production — a measure of the output of China’s factories, mines and power plants — had increased 4.4 percent last month, while retail sales had risen 3.1 percent from a year earlier. The General Administration of Customs announced last week that exports had fallen 12.4 percent in June compared with the same month last year, which had been unusually strong.

Last year, after the Shanghai lockdown, retailers in the United States and Europe ordered as much as three months’ worth of inventory from Chinese factories to allow for delivery delays, said Richard Fattal, co-founder of Zencargo, a London logistics company. Companies are now ordering half that amount, temporarily depressing China’s exports.

Some companies are also moving supply chains out of China, which will have a longer-lasting effect on exports, Mr. Fattal said.

Workers are struggling, too. The incomes of millions of people in China were severely depressed during the pandemic, and they remain weak. Unemployment among 16-to-24-year-olds, which has been particularly acute for the last year, reached 21.3 percent in June, according to data released on Monday, the highest level since China started announcing the statistic in 2018.

The economy’s performance has been anemic enough in recent weeks that Lou Jiwei, a former finance minister, publicly suggested last week that the Chinese government needed to increase spending this year by between $208 billion and $277 billion to stimulate the economy.

A few hints of strength can still be found. Unemployment for those aged 25 to 59 stayed low, at 4.1 percent. Car sales were up 8.7 percent in June compared with the previous month, the sixth month of rising sales, said Cui Dongshu, the secretary general of the China Passenger Car Association.

Why It Matters

China has a sizable influence on global growth. The government in recent years has pursued a self-reliance campaign to make more goods at home. Still, China remains the world’s largest importer of food, oil and many other commodities.

But there are many signs that Chinese families are not keen to spend — including the falling prices of staples like pork, and the drastic erosion of the housing market, which has long been the primary way to build wealth.

Many economists say that China’s demand for goods and services going forward will depend on Beijing’s policy decisions. Some, like Mr. Lou, have called for the central government to unleash a spending program to create jobs and stimulate consumer activity. But a huge accumulation of debt, particularly at the level of local governments, has made that hard to do. Officials have relied instead on monetary policy measures like cuts in interest rates, which were already reduced last month and could be lowered further.

“If there is no policy response, including monetary response, then I don’t expect much of a recovery,” Ms. Wang said.

Li You contributed research.