Summary of Key Points
Zhu Feng, Chief Economist for China at JPMorgan Chase, believes that the main focus for the Chinese economy in the second half of the year is "controllable recovery." To achieve the annual growth target, the key lies in accelerating the implementation of fiscal policies (and increasing their intensity if necessary) and transforming policy resources into job opportunities and income for residents, thereby boosting consumption and private investment. The core issue facing the current economy is that while supply is resilient, demand is insufficient, leading to a "K-shaped recovery" pattern—where new drivers of growth are strong while old ones are weak. The economy faces three major challenges: ongoing real estate adjustments, structural differences in consumption, and increasing uncertainty in external demand. The solution lies in a coordinated approach involving fiscal and monetary policies, as well as the development of service-oriented consumption and support for people's livelihoods, to help residents and businesses navigate the transition period between old and new growth drivers.
The "Backbone" of the Economy in the Second Half of the Year: Fiscal Policies Need to "Speed Up" or Even Be Intensified
Fiscal policies are crucial for economic recovery in the second half of the year. Why is this the case?
- There is money available: Fiscal spending was relatively slow in the first half of the year, and the government still has a significant amount of funds (abundant fiscal reserves). Although the issuance of special bonds (used for infrastructure projects) accelerated in June, there is room for further acceleration.
- How to spend the money effectively: Money cannot just be distributed; it must be invested in tangible projects such as affordable housing and the renovation of old residential areas, as well as generating business orders and creating job opportunities for residents. For example, when the government invests in affordable housing, construction companies get work, workers receive salaries, and the money flows into the pockets of ordinary people.
- Increase efforts if needed: If the economy does not improve by the third quarter, more fiscal policies must be introduced, such as tax cuts for small and medium-sized enterprises (SMEs) and subsidies to help them stabilize their operations and improve income prospects.
The "Strange Phenomenon" of the Current Economy: A K-shaped Recovery
A "K-shaped recovery" means that different sectors of the economy are developing in opposite directions, resembling the two legs of the letter K—some growing while others decline:
- The growing leg: New drivers of growth are strong. For instance, investment in AI and high-tech manufacturing (such as semiconductors and new energy equipment) is booming, and certain export sectors (like electric vehicles and photovoltaic products) are stable.
- The declining leg: Old growth drivers and domestic demand are weak. Real estate sales are sluggish, private investment is hesitant, and there is less demand for luxury goods such as cars and household appliances.
- The challenge: New growth drivers currently account for a small proportion of the economy and cannot yet fill the gap left by declining old ones—similar to a new source of income (such as a side job) that is not enough to compensate for the loss of main earnings.
Three Major Hurdles to Overcome in the Second Half of the Year: Real Estate, Consumption Differentials, and Unstable External Demand
These three issues are major obstacles to economic recovery:
1. Real estate has not stabilized: Problems such as unfinished buildings, inventory buildup, and local governments' reliance on land revenue remain unresolved. Solutions include accelerating the delivery of properties, reusing existing housing stock (e.g., converting vacant units into affordable housing), and building more affordable housing to reduce the negative impact on investment and confidence.
2. Uneven consumption: Service-oriented consumption (such as tourism, dining, and movies) is doing well, but major consumer goods like cars, household appliances, and housing are struggling due to concerns about income and employment. Consumer vouchers and trade-in programs can only provide temporary relief and do not address the underlying issue of lack of confidence in spending.
3. Unstable external demand: Export growth helped in the first half of the year, but there are many uncertainties in the second half. For example, conflicts in the Middle East could drive up energy prices, and trade tensions could lead to increased tariffs. Some export products (such as raw materials) rely on price increases rather than volume sales, which have limited impact on employment and income.
The Solution: A Combination of Policies, Support for People's Livelihoods, and New Growth Directions
To address these issues, a comprehensive approach is needed:
- Coordinated fiscal and monetary policies: Accelerate fiscal spending and, if necessary, increase its intensity, while maintaining sufficient market liquidity through monetary policy to make it easier for businesses and residents to access funds.
- Develop service-oriented consumption: The service industry (such as catering, domestic services, and logistics) is labor-intensive and can create many jobs. For example, opening a restaurant provides employment for chefs and servers, allowing people to earn income and spend money.
- Support for people's livelihoods and businesses: Invest in social security, healthcare, and pension programs to reduce future uncertainties and encourage spending. At the same time, help SMEs and private enterprises survive by providing tax cuts and loan support, as they are key drivers of employment.
Conclusion
Economic recovery in the second half of the year will not be a sudden rebound but a gradual stabilization process. The key is to leverage fiscal policies to create job opportunities and increase income, while addressing issues related to real estate, consumption, and external demand. The changes that ordinary people may notice include easier job hunting, more stable incomes, and the willingness to spend a little more money.