China is currently growing at a subdued pace, as shown by the latest batch of economic data.: GDP was up +0.7% during the second quarter of 2024, the softest quarterly expansion in two years. Yearly GDP growth slowed from +5.3% to +4.7% as a result, just below the official 5% target for the year 2024.

Domestic demand continues to be hampered by falling house prices and depressed consumer confidence, as shown by the Retail Sales’ slowdown recorded in June (+2.0 % YoY, the weakest growth rate since the post-Covid reopening).

Indeed, real estate prices have been declining for three years in China after the government introduced measures to stem speculation and force a deleveraging of the industry. The correction of this all-important sector has been, and continues to be, a strong headwind for China’s expansion. Indeed, it represents a quarter of China’s GDP and more than two-thirds of households’ wealth, and therefore remains a meaningful drag on domestic sentiment and consumption.

Consumer confidence is depressed as real estate prices are falling.

In parallel, industrial activity has picked up since the end of last year. Firm demand for exports, in a context of positive global economic growth, has spurred the production of goods. Exports growth has reaccelerated since the end of last year and the trade surplus reached a record high in June, as imports remain subdued in the meantime, due to weak domestic demand.

The main and fastest growing destination of Chinese exports remains Southeast Asia economies of the ASEAN, but exports to the US and to Europe also picked up recently. Total Chinese exports are up 3.6% in the first half of 2024 compared to the same period last year, led by exports to neighboring ASEAN countries and to Latam (+11%). Exports to the US have recovered (+2%) while exports to the European Union are still down (-3%) compared to the first half of 2023, reflecting the growth slowdown experienced by Europe in the second half of last year. Exports to Russia have stabilized after surging in 2023 but remain a small part of China exports so far despite rising bilateral trade between the two nations.

Overall, the rebound in global demand for Chinese goods has driven the pickup in industrial activity witnessed since the end of last year. In a context of depressed domestic demand, the positive dynamic in external demand has been supportive for economic growth so far in 2024.

While the recent growth impulse coming from external trade has been welcome to balance persistent internal weakness, this trend appears unlikely to extend for long. Firstly, favorable base effects following the export slump of the first half of 2023 will gradually fade away, and the contribution from external trade will become less visible, especially in a context where two of the main export markets (the US and Europe) are now facing softer growth momentum.

China has been facing pushbacks on its trade policies for some time now, and ongoing developments are only part of what appears to be a structural and defining trend at play since the last decade. The share of the US trade balance in China’s trade surplus has been consistently declining and is now the lowest since China joined the WTO. China has diversified its export markets toward non-Western markets such as Southeast Asia or Latam. The prospects of higher tariffs and a proper trade war with the US and Europe in the years ahead will only reinforce this dynamic.

Strikingly, Foreign Direct Investment has been consistently declining in China since last year and is down ‑30% over a year. The lack of visibility around the outlook for trade, coupled with uncertainties regarding the regulatory environment, are likely weighting on foreign investors’ decision to invest in the world’s second largest economy.