China’s Q2 GDP growth was below expectations at 6.3% year-on-year. On a quarter-on-quarter basis, growth was only 0.8%, confirming recent concerns about the recovery of the economy.

The 6.3% year-on-year growth rate was well below the 7.3% analyst forecasts. The number may appear high but compares to a low 2022 base when China was still locked down owing to its zero-COVID policy.

On a quarter-on-quarter basis, Q2 GDP growth was only 0.8%, lower than the 2.2% posted in Q1. Retail sales slowed sharply in June at a 3.1% year-on-year, compared to 12.7% in May and 18.4% in April. This point is particularly concerning as domestic consumption was expected to be the driving component of the post-COVID recovery. Industrial output expanded 4.4% year-on-year in June and fixed asset investments 3.8% during the same month.

The question remains as to whether the Chinese government will take measures to stimulate the economy at the Politburo meeting later this month. Until now, the Chinese authorities have seemed unwilling to do so, preferring to rely on a loose monetary policy. In June, China’s Central Bank cut its one-year prime lending rate by 10bp to 3.55%, but monetary policy has thus far been ineffective at reviving the property market, with developers facing cash issues and would-be buyers still lacking confidence.

A weak global macro environment does not help. The dollar value of China’s exports plunged 12.4% in June from a year ago, compared to a 7.5% decline in May. Exports to the USA and EU dropped 24% and 13% respectively.

While Project Blue still expects China to reach its 5% GDP target for 2023, the potential for an upside has narrowed over the past weeks. As such, we have revised our growth forecast from 5.5% to 5.2%. The H2 outlook largely depends on hypothetical domestic stimulus measures as the world economy is unlikely to recover in the coming months. On a medium-term basis, China appears to have entered a sub-5% growth period. It will face a challenging environment, including potentially lower foreign investments, a rising debt-to-GDP ratio and socio-economic issues. The main risk for China is being stuck in the middle-income trap. To avoid that, it will need to become an innovation-driven economy. The next few years will be crucial.