Trade thaw helps boost Q2 GDP

China's GDP grew 5.2 percent in the second quarter, demonstrating strong resilience and vitality. Looking ahead, the economy will benefit from better-than-expected results generated by Sino-US economic and trade talks.

However, challenges such as insufficient domestic demand and declining prices are expected to persist, requiring ramped up efforts to boost consumption, stabilize the property market and support businesses, in order to achieve the full-year growth target.

In the first half, the economy achieved a growth rate of 5.3 percent amid a complex and volatile external environment, with trade-in programs being a primary driver of this performance.

Driven by consumer goods trade-in policies, retail sales of consumer goods rose 5 percent year-on-year in the January-June period, improving from the 4.6 percent growth in the first quarter and significantly higher than the 3.5 percent recorded for the whole of last year.

Notably, retail sales of household appliances and similar goods — which are closely linked to trade-in policies — posted robust growth among retailers above a designated size, contributing 52 percent to economic growth.

The second factor was stronger-than-expected export resilience.

Benefiting from expanded trading partners and progress in China-US economic and trade talks, China's first half exports denominated in US dollars rose 5.9 percent year-on-year — exceeding market forecasts and contributing 31.2 percent to economic growth.

Regionally, China's exports to Africa, India, the Association of Southeast Asian Nations and Central Asia all achieved double-digit growth during the period, effectively offsetting the decline in exports to the US.

The third driver was robust industrial performance. In the first half, China's industrial added value of enterprises above designated size grew 6.4 percent year-on-year, with general manufacturing and equipment manufacturing sectors recording value-added growth of 7.0 percent and 10.2 percent, respectively, maintaining rapid expansion.

Export-related industries, including transportation equipment, electrical machinery, automobiles and electronic equipment all achieved double-digit growth in added value.

In addition, domestic demand was bolstered by large-scale equipment upgrades and consumer goods trade-in policies, further stimulating industrial output, with automobiles and new energy vehicle production surging 10.8 percent and 36.2 percent, respectively, in the period.

The fourth driver was the continuous development of new quality productive forces. As regions across China advanced these forces in line with local conditions while strengthening the integrated development of technological and industrial innovation, emerging industries, technologies and business models maintained robust growth.

In the first half, added value of high-tech industries surged 9.5 percent year-on-year, 3.1 percentage points faster than overall industrial growth.

However, China still faces impediments and challenges in four key areas.

The first challenge is mounting downward pressure on consumption growth. The remaining subsidy fund for the second half stands at 138 billion yuan ($19.2 billion), averaging 23 billion yuan monthly — lower than the 162 billion yuan and 27 billion yuan monthly in the first half.

Additionally, as trade-in programs primarily cover durable goods, the promotional effect of these policies may gradually weaken following the release of consumer demand.

The second concern is renewed weakness in the property sector. Following approximately two quarters of recovery, real estate sales showed a weakening trend starting in the second quarter. In June, real estate witnessed further intensification of dual declines in both volume and prices.

If this downward trend persists, significant spillover effects will emerge across multiple areas — investment, consumption, industrial production, local government finances and price levels.

Subdued private investment also poses challenges. In the first half, private fixed-asset investment fell 0.6 percent year-on-year, hitting the lowest level since October 2023.

Private investment grew but at a decelerated pace of 5.1 percent — excluding real estate — below the 6.0 percent recorded in the first quarter and the entirety of last year. This shows private enterprises' investment confidence continues to be dampened by persistent profitability pressures and low rates of capacity utilization.

The fourth challenge is persistently low price levels, fundamentally rooted in supply-demand imbalances caused by insufficient domestic spending appetites. In the first half, the nominal GDP growth rate was 4.3 percent year-on-year, significantly lower than the actual GDP expansion rate.

Therefore, downward pressure on China's economy could increase in the second half, necessitating timely reinforcement of policies to achieve the full-year growth target.

To vigorously stimulate consumption, in the short term, trade-in subsidies should be increased and extended to the services consumption sector, reducing restrictive measures in consumption areas while relaxing controls on high-value consumption, along with rigorous implementation of the paid annual leave system to increase leisure time among households.

For long-term measures, the government should systematically advance social security system reforms, increasing the proportion of State capital allocated to individual social security funds, elevating social protection levels for both urban and rural residents, narrowing public service gaps between rural and urban populations and boosting property income for rural residents.

The downward trend in the property sector should be promptly reversed. On the one hand, comprehensive removal of home purchase restrictions in first-tier cities should be implemented alongside further reductions in homebuying costs, including mortgage rates, down-payment ratios and taxes, interest rate cuts for mortgages and housing provident fund loans.

On the other hand, the government could utilize central fiscal resources to establish a trillion-yuan property stabilization fund.

This initiative would involve acquiring existing land and commercial properties in first and second-tier cities for conversion into affordable housing, alleviating inventory pressure, enhancing property developers' liquidity and addressing public housing needs.

The government should introduce policies to alleviate business operating pressure. This requires accelerating the resolution of overdue payments owed to enterprises through measures such as allocating more newly issued local government special bonds toward settling debts.

Simultaneously, the government can roll out a package to curb excessive internal competition, rectify market failures, standardize market order and ultimately promote price recovery and improved corporate profitability.

The writer is vice-president and chief economist at Chinese e-commerce giant JD.

The views do not necessarily reflect those of China Daily.