China’s economy slows as domestic demand shrinks

New Delhi, July 26 (IANS) China’s GDP growth slowed to a mere 4.3 per cent in the second quarter this year due to declining domestic demand, reflecting the worsening structural imbalance in the export-dependent economy.

“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,” according to an article in published by MERICS (Mercator Institute for China Studies).

China’s economic imbalances are becoming more entrenched. Domestic car sales collapsed by 16.1 percent in June year on year, reflecting weak consumer confidence and suppressing headline growth, the article observes.

Although China’s domestic economy is in the doldrums, its international trade remains strong. Exports increased by 27.0 percent in June and imports by 36.0 percent on a USD value basis. High-tech products performed particularly well, suggesting China’s export boom still has significant room for growth.

The article highlights that as China’s structural imbalances intensify, with the country’s continued growth in exports, the EU-China trade tensions will remain high.

While export volumes have grown, import volumes have remained largely flat. Rather than importing significantly more goods, China is simply paying more for them due to rising prices for commodities and high-tech products.

The article underscores that China is too reliant on exports to budge in EU trade negotiations.

The growing inflow of Chinese goods to Europe has catalyzed a review of the EU’s trade defense toolbox. Even the German government has dropped its usual caution about criticizing distortions generated by Beijing’s industrial policy to speak more candidly on China’s unfair trade practices. However, EU policymakers should not expect any concessions from Beijing during discussions on trade and investment. Given the economic pressures it faces at home, China is likely to be as intransigent as ever, the article states.

However, even with the surge of exports, Beijing will need to aim for at least moderate growth in consumption and investment to avoid a broad-based slowdown and keep its growth target. And yet serious steps to boost consumption are not on the cards. Beijing’s professed commitment to raising household spending is a long-term goal which would require difficult structural reforms. Even substantive reforms would take several years to have an impact, the article observed.

–IANS

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