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China slowdown pressures Xi as goal of doubling GDP fades

Trump takes victory lap, saying low growth signals success of his policy

Chinese President Xi Jinping will face an enormous challenge in navigating the economic slowdown.   © Reuters

BEIJING -- China could fall short of its pledge to double GDP in the 10 years through 2020 after the April-June growth rate declined to its slowest pace since 1992, as the trade war exacts a toll on exports.

Real gross domestic product rose 6.2% on the year during the three months ended in June, down 0.2 percentage point from the previous quarter's growth. On an annualized basis, it's the lowest rate since the 3.9% marked in 1990, the year after the Tiananmen Square crackdown.

For China to realize its economic expansion goal, GDP will have to rise by an average of at least 6.2% this year and in 2020. The statistics released Monday signal that China's growth is struggling to keep pace with the government's plans.

U.S. President Donald Trump immediately took credit for China's slowdown, saying in an early Monday tweet that China's slowing economy demonstrates the success of his trade war.

"The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving," Trump wrote. "This is why China wants to make a deal with the U.S.," the president added, reiterating his claim that the U.S. is receiving "Billions of Dollars in Tariffs from China."

The 6.2% GDP reading for the second quarter could still be overstating the economy's strength. According to official trade statistics, external demand contributed 1.3 points to GDP growth during the first six months of the year.

But the figure, derived by subtracting the volume of imports from exports, is largely a reflection of soft internal demand, which pushed down imports by 4%. As exports remained flat, the trade surplus expanded. Bulk purchasing by Chinese tourists traveling overseas has also lost steam, shrinking the deficit for trade in services. Because external demand's contribution was negative 0.7 point in the previous year, on paper, the poor performance of China's internal demand ended up lifting economic growth by 2 points.

The Chinese Communist Party first planned to double the GDP during the party's National Congress in 2012, the same setting where Xi Jinping was first appointed as general secretary. Xi became president the following year.

The government's official goal is to expand GDP between 6% and 6.5% this year. But many analysts think the low end is actually set around 6.2%, Wu Ge, chief economist at Changjiang Securities, said in a recent report.

China's GDP growth for the first half stands at 6.3% -- still above the 6.2% threshold, but economists are not optimistic. "We shouldn't underrate the downward pressure on the economy during the second half," said Ting Lu, chief China economist at Nomura International.

China's property market is of particular concern. Investments in real estate rose 11% during the first half, but the surface area sold shrank 2%. The scale of the country's project to redevelop shantytowns in smaller cities contracted by half this year compared with 2018, a change that threatens to weigh down the property market in these cities.

Authorities are tightening financing for real estate amid worries that the housing bubble will collapse.

For now, Xi and his policymakers plan to ascertain the effects of the 2 trillion yuan ($290 billion) in tax breaks approved in March. 

"They aren't likely to come up with another large-scale economic stimulus package," a senior Chinese economic official said. The fear of reigniting the country's debt problem drives the cautious approach.

Weak exports have ramifications for manufacturing and investment. January-June industrial production rose 6%, down 0.5 percentage point from January-March. Foreign companies' exports from China grew a tepid 1%, and power generation, an indicator of manufacturing strength, increased a moderate 3%. Cars and cellphones both saw declines in production, and output of robots, which were hit by additional U.S. tariffs, fell 10%.

"Investments in the industrial sector continue to be lackluster, rising 3%, and the infrastructure investments underpinning the economy are slowing down, meaning the fruits of the government policies [such as tax cuts] are not emerging fully," said Yusuke Miura, chief researcher at Mizuho Research Institute.

Retail sales rose 8.4% in the six months, up 0.1 point from January-March. But a closer look at the details reveals a weak appetite for spending.

Car sales fell 12% in unit terms. Movie revenues fell 3% while customer traffic at theaters dropped 10%. January-May sales at the top 5,000 retailers rose just 2%. Retail sales appear to have been pushed up as automakers unloaded inventories ahead of the tightening of emissions rules from July, according to Mao Shengyong, a spokesman for the statistics bureau.

Uncertainty over the labor market is casting a pall over consumer spending. New hires in urban areas during the first half totaled 7.37 million, down 2% on the year. The declining birthrate is reducing the number of young people ages 18-30 by 10 million every year, also weighing on consumer spending.

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