China’s weak growth revives talk of cash vouchers By Reuters

By Kevin Yao and Ellen Zhang

BEIJING (Reuters) – Another round of bad Chinese economic numbers is increasing pressure on Beijing to loosen the fiscal cap further and even hand out shopping vouchers to return growth to this year’s target of around 5 percent.

After a dismal second quarter, the world’s second-largest economy lost steam again in July: new home prices fell at the fastest pace in nine years, industrial production slowed, exports and investment grew fell and unemployment rose.

Other data beat forecasts, but not for positive reasons. The rise in inflation was attributed to bad weather rather than stronger domestic demand, a surge in imports reflected anticipated chip purchases ahead of expected cuts in US technology, and retail sales growth was flattered by weak 2023 comparisons.

Overall, the data paint a worrisome picture for policymakers, who look increasingly likely to accelerate stimulus if they don’t accept slower growth and the prospect of a downward spiral in consumer and business confidence.

“Current economic performance remains behind target, requiring immediate and significant policy interventions,” said Carlos Casanova, senior Asia economist at UBP. This could require the government to raise the budget deficit to 4 percent of gross domestic product (GDP) from the planned 3 percent, he said.

A political adviser, speaking on condition of anonymity, said Beijing could decide in October to anticipate part of next year’s bond issuance quota if growth shows no signs of bottoming out in the summer.

“Otherwise, the economy will look ugly, and 5 percent would be out,” the adviser said, without elaborating on where that stimulus would go.

China made similar moves last October when it raised the deficit to 3.8% of GDP from 3.0% and separately introduced part of local public debt quotas for 2024 to invest in flood prevention and other infrastructure .

What might change from last year is how the extra money would be spent.

The usual playbook of infrastructure spending brings diminishing returns after decades of investment in bridges, roads and rail. Meanwhile, China’s favorite engine of growth, advanced manufacturing, is fueling trade tensions and concerns about industrial overcapacity and factory-gate deflation.

“The Chinese economy, given its size, cannot run on manufacturing and exports alone,” analysts at Societe Generale (OTC: ) wrote in a note on the latest data.

“To reach the 5% growth target – if that is still the target – policymakers need to step up support for domestic demand.”

VOUCHER TALK RESURFACE

As consumers tighten their wallets, Chinese e-commerce giants have had to resort to deep discounts and promotions to attract shoppers, squeezing margins in the retail sector.

Alibaba (NYSE: ) Group Holding missed market expectations on revenue Thursday as the company’s domestic e-commerce sales came under pressure from prudent spending.

A high-level policy meeting in July promised a gradual shift towards consumer stimulus, in what analysts saw as a formal admission that the previous toolkit had not worked as intended.

An article in state media this week revived an idea implemented in the United States and elsewhere during the pandemic but resisted in Beijing.

China Daily, citing three economists from government-backed think tanks, said the government “should consider additional direct consumer support worth at least 1 trillion yuan ($139 billion) — either cash, or vouchers”.

This amount is equivalent to 0.8% of last year’s GDP.

Such a step “would require extending this year’s deficit rate or approving additional special Treasury bonds,” the article said. Li Daokui, director of Tsinghua University’s Academic Center for Chinese Economic Practice and Thought, said it was “advisable” for the consumer coupons to be issued during the week-long National Day break in October.

Most economists are skeptical that Beijing will implement such a move, given past resistance. During the pandemic, officials preferred to support businesses and let consumers fend for themselves.

Xing Zhaopeng, senior China strategist at ANZ, said the impact of such vouchers would be unique and consumption would only grow sustainably when the battered property market and stocks start to recover.

He estimated that household property wealth has fallen 20%-30% from a peak of 600 trillion yuan – a drop roughly equivalent to China’s annual economic output.

“People will spend during the month they receive vouchers,” Xing said. “Only property and stock prices will set consumption in perpetual motion.”