China's Economic Growth Declines Amid Weak Domestic Demand

China's economic expansion has slowed significantly in the second quarter of 2023, growing by 4.3%, below the government's target. This marks a decline from the 5% growth recorded in the first quarter. The official data highlights the challenges faced by the world's second-largest economy, notably weak domestic demand influenced by external factors, including the ongoing conflict in Iran and fluctuating oil prices.

On 28 February, the Iran war commenced, which has since affected various sectors in China. The National Bureau of Statistics indicated that the reported growth is the lowest quarterly figure since late 2022, a period during which China was overcoming strict Covid-19 measures.

In March, Chinese authorities reduced their annual growth target to between 4.5% and 5%, the lowest benchmark since 1991. Some analysts interpret this adjustment as a candid acknowledgment of existing economic vulnerabilities rather than a direct response to recent developments.

"There are more external instability and uncertainty factors," stated the National Bureau of Statistics in a report accompanying the latest GDP figures. The analysis also pointed out an imbalance between robust supply and feeble demand within the local economy.

Additional data illustrates ongoing issues within China’s economic landscape, including a protracted downturn in the property sector and lacklustre consumer spending. Although new home prices fell by 0.1% in June, the rate of decline was slightly mitigated compared to the previous month. Conversely, retail sales improved, increasing by 1% in June, a recovery from a 0.6% drop in May.

Fabien Yip, a market analyst at investment platform IG, commented on the situation, explaining that businesses are facing rising energy and raw materials costs. She noted that, "demand at the till is too weak to bear it." Yip suggested that the economic landscape will become increasingly challenging as the Iran conflict persists.

Julian Evans-Pritchard, head of China economics at Capital Economics, provided a contrasting perspective. He remarked that the slowdown in economic performance might not directly correlate with changing external conditions but rather reflect a shift in the growth target that permits authorities to recognise and address underlying weaknesses.

According to Evans-Pritchard, "This may largely represent a greater willingness to acknowledge pre-existing weakness rather than a sudden deterioration in underlying growth." He assured that the latest economic figures appear to align more closely with Capital Economics' assessments of Chinese growth.

Despite the overall slowdown, June's data offers some optimism, with signs of improvement across multiple indicators. Customs data released on Tuesday revealed that China's technology exports have benefitted from a substantial global demand for semiconductors used in artificial intelligence data centres. Moreover, the export of electric vehicles has surged, with monthly car exports exceeding one million units for the first time, driven by heightened global interest in renewable technologies.