Market Data 
China’s economy is under siege from tariff hikes by the US and the European Union, but this may not be its most immediate threat.
Instead, China’s sluggish domestic demand appears to be a more pressing issue.
On Monday, Beijing released new data that underscores the scale of China’s domestic consumption problem.
China’s economy grew 4.7% in the second quarter of this year from a year ago, according to the National Bureau of Statistics — missing the 5.1% growth analysts polled by Reuters had expected.
Growth was dragged by weak consumption, with retail sales of consumer goods expanding just 2% in June from a year ago. In June, sales of cars, cosmetics, and household electronics and musical instruments slumped 6.2%, 14.6%, and 7.6% respectively from a year ago, the data showed. Notably, even as consumption fell in all these categories, residents’ disposable income grew.
Not the first indicator of trouble
The data released on Monday comes after another data release signaled trouble a few weeks ago.
China’s official Purchasing Managers’ Index represents larger companies and state-owned enterprises, many of which are in industrial manufacturing. The index contracted for the second straight month in June, data released on June 30 shows.
In contrast, an S&P Global PMI reading — which reflects activity at export-oriented small and medium private businesses — showed output growth hit a three-year high in June.
That means consumer demand within China is slowing, even as demand for made-in-China products grows externally.
The divergence is important because China — the world’s factory — could face lower global demand for some of its exports after trade tariffs kick in.
In a recent report, economists at Nomura wrote that there are “concerns that China’s economy will be unable to sustain a strong recovery through depending only on exports.”
The market’s conviction in China’s recovery is eroding, the Nomura economists wrote, with China’s benchmark CSI 300 index giving up some gains after hitting a May peak.
China has acknowledged it faces challenges in the consumption space.
“We should be aware that the external environment is intertwined and complex, the domestic effective demand remains insufficient and the foundation for sound economic recovery and growth still needs to be strengthened,” China’s National Bureau of Statistics said on Monday.
While exports may continue to support growth in the coming months, “it probably won’t overcome weakness on the domestic side,” Eric Zhu, an economist at Bloomberg Economics, said in early July.
China’s unwilling consumers
China is facing a real-estate crisis, stock-market volatility, geopolitical headwinds, and demographic challenges.
The economic uncertainty is contributing to weak consumer sentiment and risk hedging. People are spending their money on gold and experiences instead of discretionary goods.
Weak consumer demand is bad for China’s economy, as it can contribute to a vicious cycle of deflationary pressure on the back of slowing wage growth and consumer spending. Not even China’s mega-sales festivals can entice buyers to spend money the way they used to.
“The divergence between expansionary production and contractionary new orders suggests activity data on the supply side may continue to outperform demand-side activity data, which is likely to exert continued downward pressure on goods prices,” the Nomura economists wrote in a separate note in early July.
The contraction in official manufacturing PMI and a pullback in industrial profits also validate concerns of “‘too little, too late’ policy stimulus,” Vishnu Varathan, the chief economist of Asia excluding Japan at Mizuho Bank, in early July.
“Doubts that Beijing has a handle on economic revival are justifiably mounting,” Varathan added.
July 15, 2024: This story has been updated with new data from China’s National Bureau of Statistics.
