By Keith Bradsher

BEIJING – Economic growth slumped in China through the spring after a strong start this year, according to data released Monday (15), as a real estate crash caused consumers to spend more cautiously.

The latest growth statistics for the world’s second-largest economy, covering April through June, put further pressure on the Communist Party as its leaders gathered Monday in Beijing for a four-day conclave to set a course for the country’s economic future.

In a country known for strict controls on information, the Chinese government is maintaining a particularly tight grip ahead of the party gathering, known as the Third Plenum, which typically takes place every five years. China’s National Bureau of Statistics cancelled its usual news conference that accompanies the release of data and Chinese companies are mostly avoiding the release of earnings reports this week.

China’s economy grew 0.7% in the second quarter over the previous three months, below the expectations of most economists. When projected out for the entire year, the economy grew at an annual rate of about 2.8% — a little less than half the rate in the first three months of this year.

The statistical bureau also revised down its estimate of growth in the first quarter. That rate, projected out for the full year, was about 6.1%, not the 6.6% rate disclosed in April.

Xi Jinping, China’s top leader, is trying to win confidence in his policies as growth falters and the property market suffers.

China has tried to offset the real estate downturn by building more factories — new investments in manufacturing surged 9.5% in the first half of this year — and stepping up exports.

The rapid expansion of manufacturing has led to a glut of goods, from chemicals to cars, and a lot of unused industrial capacity. Companies have sharply reduced prices to compete for consumers, who nonetheless remain reluctant to spend, long a problem for the investment-led economy.

At the same time, China’s record-setting export surge is provoking a global backlash of higher tariffs, as countries fear the flood of Chinese goods will overwhelm local industries. Yet in China, the extra export revenue has not been enough to fully offset weak consumer spending at home.

The statistical bureau summarized the state of the economy with a cautious statement. Progress had been made in upgrading Chinese industries, the bureau said, while acknowledging that “the domestic effective demand remains insufficient.”

Shares of large mainland Chinese companies dropped in Hong Kong trading after the data release.

The slowdown in growth was less apparent in the Chinese government’s preferred statistic: how much larger the economy was in the second quarter versus the same period last year. This measure showed the economy had grown 4.7%, down from 5.3% year-over-year growth in the previous quarter.

China’s government has set a target for growth this year of “around 5%.”

The government is trying to revitalize consumer spending. Retail sales grew just 2% in June from a year earlier, propped up only by strong sales of food. Car sales slumped 6.2% in June from a year earlier, partly because automakers have cut prices to attract buyers.

Analysts at Société Générale, a French bank, called the slump in retail sales “just shocking”, and described China’s economy as “limping along precariously”.

Economists inside and outside of China have contended that Beijing should sharply increase state pensions, government-provided health insurance and welfare payments. Such measures could be funded by trimming China’s extensive military build-up or by transferring dividends and shares from state-owned enterprises to the national pension fund. The government has been reluctant to redirect large sums of money from agencies or state-owned firms.

Few expect drastic moves at the Communist Party conclave. The country continues to pursue an investment-led strategy that focuses on erecting more buildings instead of putting money into consumers’ pockets.

That trend was visible on a recent evening in Nanchang, a city in south-central China. The Wanshou Palace neighbourhood has been extensively renovated with stone walkways, free music shows, and many shops and restaurants. Throngs of tourists milled in the streets taking photos, but few entered the stores or eateries to spend money.

Recent actions by local governments have taken money from households, further eroding their ability to spend. Faced with falling revenue because of the real estate crisis, local governments have stepped up tax collection and audits, and have begun raising fees for services such as natural gas, water and sometimes rail travel.

Many shoppers say they buy the cheapest products they can find to stretch their budgets. Gong Yilan, a 21-year-old teacher, paid the equivalent of $3.40 for a pair of blue earrings as a souvenir during a vacation in Jingdezhen, another city in south-central China.

“If I spend too much on costly things, I don’t have enough money to support my next trip,” she said.

Local governments face financial difficulties mainly because of dwindling sales to developers of leases on state land. Builders are struggling to finish promised housing units and have scant cash to spare.

“Simply put, with 20 million or so unfinished, presold homes behind in their delivery schedules, the housing crisis is not over yet,” analysts at Nomura, a Japanese bank, said in a research report Wednesday.

Until recently, housing construction was one of China’s biggest industries, creating millions of jobs. Apartment sales appear to be levelling off after three years of declines but at a very low level. As in many countries, commercial real estate is starting to run into trouble.

Construction companies in China are trying to weather not just a slowing pace of domestic building but dwindling orders from overseas. China has put a limit on loans to developing countries over the past several years, as many of these borrowers have struggled to repay previous loans.

Zhongmei Engineering Group, a Chinese construction company in Nanchang, used to build as much as 40% of its projects overseas, mainly in Africa. But now these projects are less than 20% of its business.

“They are not financially able to hire our company,” said Qin Jian, general manager of Zhongmei’s international operations.

Like many Chinese construction companies, Zhongmei has turned to building more infrastructure and factories in China. Beijing has helped local governments borrow money to spend on new sewers, water lines, roads and other infrastructure.

A persistent worry is that China may have so much excess factory capacity that the economy may see a broad decline in prices — a dangerous phenomenon known as deflation. Falling prices give consumers an incentive to put off purchases in hopes of getting a better deal later and make it harder for borrowers to repay their debts. Overall debt levels in China are higher than in the United States relative to the size of their economies, mainly because of heavy borrowing by state-owned enterprises. Many Chinese are struggling to make mortgage payments on apartments that are falling in value.

Wholesale prices charged by factories, farms and other producers had dropped 0.8% in June from a year earlier. Consumer prices are still rising, barely: up just 0.2% last month from the year before.

The Chinese economy has had two bright spots in recent weeks, however. A decision to stop requiring visas for tourists from more European countries and Australia and New Zealand has produced an immediate jump in international visitors. Hotels in the heart of Shanghai and Beijing have raised prices sharply. But hotels even a couple of miles away still charge rates that have barely increased since the worst days of the COVID-19 pandemic.

Much more important for the Chinese economy has been a powerful boom in exports of manufactured goods. The country’s overall trade surplus — the amount by which exports exceed imports — surged last month to a record $99 billion.

-New York Times