China's growth jolt masks deeper economic threat

AllAfrica

2 days ago

China's economy is flashing mixed signals again – just when clarity is needed most. June's factory and construction data came in stronger than expected, with the manufacturing purchasing managers' index (PMI) rising to 49.7 from 49.5.
This small but symbolic improvement suggests momentum in parts of the economy. But beneath the surface, the warning signs are impossible to ignore. Deflation remains entrenched, job creation is weakening and doubts are mounting over whether Beijing will – or even can – deliver the stimulus that markets have been betting on.
The data, released Monday, gave markets a brief shot of optimism. Construction and services activity accelerated, adding to the sense that policy support measures announced earlier this year may be gaining limited traction.
Export orders rebounded, helped along by the 90-day tariff truce with the US that began in April. Traders hunting for any sign of stabilization seized on the numbers. For a few hours, bond yields rose and equity markets bounced.
But the relief faded almost as quickly as it arrived.
Within the details of the PMI reports were signals that the broader economy remains under serious strain. Factory output may have ticked up, but new domestic orders remain soft. Price indicators continue to show persistent disinflation, with producer prices now falling for the 21st consecutive month.
Consumer inflation is hovering near zero, heightening fears that China could soon slip into a more damaging deflationary cycle.
Employment data is even more troubling. Officially reported figures remain vague – especially after the government last year stopped publishing youth unemployment numbers altogether – but the anecdotal evidence is piling up. Private sector hiring is slowing across manufacturing, tech and services. Wage growth is flatlining. Underemployment in major cities is rising.
This matters politically as much as economically: Beijing knows that an unstable job market poses risks to social cohesion.
The timing of this latest economic wobble couldn't be worse.
With US President Donald Trump making clear that tariffs could snap back into place after the temporary truce expires in July, Chinese exporters face another looming external shock. The recent improvement in export orders may simply be the result of front-loading by nervous manufacturers rushing shipments ahead of possible new levies.
For Beijing, the policy dilemma is becoming more acute. Officials have so far avoided sweeping stimulus measures this year, opting instead for targeted liquidity injections and selective fiscal support aimed at infrastructure and small business lending.
This cautious approach reflects a growing recognition that past stimulus waves have left a heavy legacy of debt and distorted investment patterns—especially at the local government level.
Yet doing too little carries its own risks. If domestic demand remains weak and deflationary forces deepen, growth momentum could stall again by late summer. Real estate, once the cornerstone of China's economic expansion, remains in deep distress. New home sales are sluggish.
Developers continue to struggle with liquidity shortfalls. Construction activity, while improving on paper in June, is still running far below pre-pandemic levels.
Retail sales data underscore the fragility of consumer sentiment. After an early-year rebound, spending growth has cooled again. Business investment, especially from private firms, remains hesitant.
Elsewhere, foreign direct investment is under pressure as multinational companies reassess their China exposure in light of shifting geopolitics and regulatory unpredictability.
Financial markets are watching all of this with increasing unease. After the PMI release, traders pulled back expectations for further near-term monetary easing. Yields on 30-year Chinese government bonds spiked by the most in over a month, as the data gave policymakers room to delay fresh action. But few expect that pause to last long. Second-quarter GDP figures, due in mid-July, could quickly reignite pressure for a more forceful response.
At the same time, Beijing's room for maneuver is shrinking. The People's Bank of China faces competing demands to stabilize growth, contain debt risks and preserve currency stability amid ongoing capital outflow concerns.
Aggressive interest rate cuts could trigger new financial distortions and further squeeze bank profitability. Expanding fiscal deficits carries its own political and economic risks.
The international backdrop only adds to the uncertainty. Global demand remains patchy, with key trading partners in Europe and Asia still grappling with their own growth challenges. Technology export restrictions and supply chain realignments continue to weigh on business confidence. Geopolitical tensions, especially with the US, show no sign of easing.
Against this backdrop, the question isn't whether China needs stronger stimulus—but how far policymakers are willing to go. More targeted support is almost certain. But without broader measures to lift consumer spending and stabilize the housing sector, piecemeal fixes may not be enough to prevent another growth slide.
Investors should expect volatility to rise as the July tariff deadline nears and second-quarter growth data is published. June's modest upside surprise won't silence the calls for more decisive action.
Beijing may have bought itself a little time – but not much. The pressure for a stronger response is building, and the clock is ticking.
Nigel Green is the deVere Group CEO and founder.