China’s economy shows faint signs of stabilization over Q3

The Chinese economy faced considerable challenges over the summer as the slump in the real estate sector continued weighing down consumer sentiment and added stress to local government finances. The country also battled severe heat and flooding, which hurt economic activity. Key economic indicators deteriorated sharply in July and August as a result, setting the stage for a disastrous Q3, which did not quite materialize, thanks to an unexpected rebound in September. In the end, Q3 GDP grew 4.6 percent, down only 0.1 points from the Q2 performance. Although not great, it put this year’s growth target of “around five percent” within reach.

China’s economy has now been in a nearly three-year slump, weighed down by a deepening contraction in the real estate sector, sluggish consumption, a weak labor market and entrenched deflation. As the year draws to a close, the leadership faces growing pressure to take action. Economic tensions continue to mount, despite progress towards the leadership’s strategic economic objectives, which put the focus on technology and growth in high-tech manufacturing.

The Politburo, the top decision-making body of the Chinese Communist Party (CCP), responded to the sluggish economy by announcing plans for more economic support. It followed up with a series of stimulus measures in September (and October) from the People’s Bank of China, the National Development and Reform Commission, and the Ministry of Finance, among others. These policy adjustments raised market expectations about the scale and scope of government intervention to lift the economy, which were soon disappointed.

Rather than pursuing growth at any cost, the stimulus aims to mitigate swelling risks. In light of an expected slowdown in exports and industrial production, a key goal is to stabilize GDP growth for 2025. To achieve this, the government must stabilize the tumbling real estate sector, which is the primary cause of local governments' fiscal distress and weak household sentiment holding back consumption.

While the stimulus acknowledges some of the economy’s challenges, the measures remain restrained compared to the scale of the headwinds. A more expansive fiscal package, including direct household support, has been hinted at but have yet to materialize. While more support is certainly on the cards, there is also a risk that the additional support will again fall short of market expectations.

These expectations stem from hopes for a return to pragmatism in China’s economic policies. However, under President Xi Jinping, the economy is undergoing a painful realignment from real estate toward technology, with economic weak spots tolerated as long as strategic objectives are met.

The recently announced stimulus measures highlight this focus on strengthening the industrial base and innovation. Balancing a booming tech sector with a struggling real estate market and increasingly distressed middle-class will be difficult in the coming months. But, for now, the pressure remains manageable, and policy adjustments are focused on managing both internal and external risks.

Macroeconomics: China’s GDP growth holds up relatively well in a challenging quarter

• China's economy performed better than expected in Q3 2024, despite weak initial data in July and August. GDP growth slowed only slightly to 4.6 percent year-on-year, down from 4.7 percent in Q2, helped by improvements in key indicators in September. Although this suggests some stabilization, growth remains fragile and was in much need of the stimulus measures announced at the end of the quarter. 
• In the first three quarters of this year, GDP growth expanded by 4.8 percent. However, the stimulus is unlikely to lift full year 2024 GDP growth above five percent. But as long as it reaches the lower levels of the government’s deliberately unspecific growth target of “around five percent” the outcome will be acceptable for the leadership, which puts more priority on achieving a tech-focused transformation of the economy than on mere growth alone. 
• Nominal GDP growth has been below real GDP for six consecutive quarters as the economy battles with deflation. In the first six months of this year, nominal GDP grew 4.1 percent year-on-year, 0.7 points below real GDP.