China’s economy hits a weak spot: consumers aren’t spending

China’s local economic indicators are declining, and policymakers are under the gun to jump-start growth. For starters, China’s retail sector struggled to maintain its momentum in August.

The National Bureau of Statistics showed that retail sales growth slowed to 0.4%, marking a slowdown from July’s 0.6% growth and missing the 0.8% Bloomberg consensus forecast. 

Additionally, China’s long-term investments, including property and infrastructure, dropped 7.2% through August, a larger decline than the 6.7% slide seen through July.

The urban unemployment rate also edged higher in August, rising to 5.3% from 5.2% in July. In contrast, factory output grew by 5.2% in August, as global demand for the country’s exports soared.

The NBS asked government officials to push for domestic consumption

Speaking about declining local economic indicators, the National Bureau of Statistics pointed to a sharp mismatch between high supply and low demand. The agency also noted that some businesses had challenges managing their operations, hence the lower sales.

It has thus recommended stronger macroeconomic measures, encouraging domestic consumption, and supporting industrial modernization through innovation.

The agency also revealed that new home prices slowed in 70 cities, falling 0.17%. Resale home prices declined by 0.31%, worsening from the 0.29% drop seen in July. 

Overall, China’s economy grew just 4.3% in the second quarter, putting growth near its lowest level in decades. At the time, a five-year real estate slump, combined with weak consumer spending, dragged the economy down.

China’s second-quarter numbers fell far behind its annual growth target of 4.5% to 5%. Instead of launching a massive rescue package, officials are opting for slow and steady support. 

Weak domestic demand puts more pressure on Beijing

The latest figures highlight the growing challenge facing Beijing as it tries to shift the economy toward stronger domestic consumption.

While factories continue to benefit from overseas demand, weak household spending and the prolonged property downturn are limiting growth at home. Falling home prices could also make consumers more cautious about spending, particularly as property remains a major source of household wealth.

Weakness in domestic demand could increase pressure on policymakers to introduce measures to encourage households to spend and businesses to invest. These could include targeted consumer incentives, support for the property market, and measures aimed at improving household confidence.

However, relying heavily on exports may become more difficult if global trade tensions increase. Chinese manufacturers are already facing greater scrutiny from major trading partners over industrial overcapacity and competition in sectors such as electric vehicles, batteries, solar equipment, and technology. This means Beijing may need to do more to strengthen domestic demand if it wants to maintain stable growth.

The government has also tried to push more borrowing, but China’s August credit numbers fell way short of expectations due to very low demand from households and businesses. New bank loans rose by just 60 billion yuan ($8.95 billion), falling way short of the 400 billion yuan prediction and last year’s 590 billion yuan mark. 

So far, strong exports have kept the economy moving, driven by a global AI investment boom that boosted demand for Chinese chips and hardware. The nation’s massive oil reserves have also allowed it to scale back on imports to avoid high prices. Concurrently, factory orders and output expanded in August after shrinking in July.

China’s manufacturing purchasing managers’ index (PMI) stood at 49.8%, while the business activity expectations index reached 53.8%. Meanwhile, industrial enterprises above the designated size earned combined profits of 4,582.1 billion yuan, roughly $682.83 billion from January to July, representing a 17.6% year-on-year increase. 

Retail sales rose slightly for the first eight months of the year

From January to August, total store and web sales ticked up 1.1%. Internet shopping carried the weight, growing 4.6% overall with solid growth in both physical goods and digital services.

Sales of goods through online platforms totaled 8,419.5 billion yuan, equal to about $1.25 trillion, an increase of 4.3%. Online service sales also grew, reaching 5,057.1 billion yuan, equal to about $753.61 billion, up 5.1%.  

Cumulatively, urban retail sales increased by 0.2%, while rural sales grew by 1.6% in August. For the month, demand for everyday essentials also remained healthy, with sales of beverages and grain, oil, and food increasing 4.9% and 4.0%, respectively. Communication equipment was among the strongest-performing categories, with sales rising 27.3%.

The latest figures show that China’s economy remains heavily dependent on industrial production and external demand, while domestic consumption continues to struggle.

With property prices falling, credit demand remaining weak, and retail sales losing momentum, Beijing faces growing pressure to strengthen household confidence and revive domestic spending.

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