In July, China’s industrial and retail sectors both cooled down, with fixed asset investment falling by 6.7%. On the same day when the data was released by the Chinese National Bureau of Statistics, Premier Li Keqiang openly stated at a State Council meeting that the “issue of insufficient domestic demand still stands out.”
The data released by the National Bureau of Statistics on July 17 showed that three major indicators simultaneously weakened. Among them, the value added of industrial enterprises above designated size increased by 4.5% year-on-year, significantly slower than the 5.3% growth in June; total retail sales of consumer goods increased by 0.6% year-on-year, far below the 1% growth in June; fixed asset investment for the first seven months decreased by 6.7% year-on-year, further widening from the 5.7% decline in the first half of the year and falling short of the market’s expectation of a 6% decrease.
In recent years, amid weak domestic demand, expanding investment has been an important tool for the Chinese authorities to stabilize the economy. However, the growth rate of investment is also clearly slowing down. Market analysts have warned that the difficulty of relying on investment to counteract weak consumption is increasing.
According to a report by “Jiemian News,” Xu Tianchen, a senior economist at The Economist Intelligence Unit (EIU), stated that “the sharp drop in investment is unacceptable to Beijing.” Wang Qing, Chief Macro Analyst at East Money Information, attributed the slowdown in retail to the diminishing effect of replacing old products with new products, the higher base from the previous year, and the continued adjustment in the real estate market affecting consumer confidence.
Additionally, the data from the National Bureau of Statistics of China showed that the urban surveyed unemployment rate in July rose to 5.2%. The Bureau stated that some enterprises still face issues such as “unclear connection between production and sales and greater pressure on enterprise fund turnover,” indicating that the operational pressure on enterprises has not significantly eased.
On the same day, Li Keqiang admitted at the State Council meeting that the “issue of insufficient domestic demand still stands out” and noted that “some industries and enterprises are facing more difficulties.” This is the latest statement made by the State Council on current economic pressures following the official release of the July economic data.
Li Keqiang acknowledged the issue of insufficient domestic demand but proposed expanding effective investment as the main response. This includes accelerating the construction of the “six networks” (water network, new power grid, computing power network, new generation communication network, urban underground pipe network, logistics network) and “timely introducing practical and effective incremental policies” to “further strengthen the domestic big circulation.”
It is worth noting that Li Keqiang’s call for “incremental policies” also almost confirmed what market analysis has pointed out, that the marginal benefits of existing policies such as subsidies for replacing old products and stimulus measures are diminishing. As consumption and investment face pressures simultaneously, the market is beginning to focus on whether the new round of policies can truly boost domestic demand, rather than just continue to promote government-led investment projects.
Amid the simultaneous slowdown in private investment and consumption growth, the authorities are pinning their hopes on state-owned enterprises. According to a report by “Caijing,” facing economic pressures in the second half of the year, state-owned enterprises must play the role of the “ballast stone” for economic development.
The report summarized the first-half “report cards” and second-half work plans announced by the State-owned Assets Supervision and Administration Commission and major central enterprises. The data showed that in the first half of this year, the fixed asset investment of central enterprises grew by 4.5% year-on-year, while the national fixed asset investment declined by 5.7% year-on-year, forming a clear contrast. The report pointed out that central enterprises will focus on key areas such as the “six networks” in the second half of the year, echoing Li Keqiang’s investment direction.
Market analysts generally believe that China’s insufficient domestic demand is related to factors such as the low proportion of household income to GDP and the negative wealth effect caused by the depreciation of real estate. On the other hand, private investment typically accounts for about half of the national fixed asset investment. With the continuous decline in investment willingness of private enterprises, the authorities are increasing investment through state-owned enterprises to fill the gap in private investment. Whether this can truly drive domestic demand and how long this model can be sustained are receiving attention from the market.