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china's economy has slowed after the reopening-induced rebound in the first quarter. the slowdown will put pressure on the government's 5 percent growth target for this year. with the persisting real estate downturn and weakening external demand, china's policymakers will be keen to prop up domestic demand in the coming months. so there is a good chance we will see more policy stimulus to support domestic growth. data published by the national bureau of statistics on july 17 show gdp rose 0.8 percent quarter-on-quarter in the second quarter, down from 2.2 percent during the first three months of the year. while a year-on-year comparison shows gdp growing by 6.3 percent in the second quarter, this seemingly robust pace was mainly because of favorable base effects from last year when major chinese cities were hit by the strict measures taken during the novel coronavirus pandemic. delving into the retail sales data for june, we see that the first-quarter bounce has largely faded. retail sales missed market expectations, slowing to 3.1 percent year-on-year in june from 12.7 percent in may. in sequential terms, retail sales were only up by 0.2 percent month-on-month. admittedly, the consumption recovery is still underway, but it is happening at a quite modest pace now. during june, the catering sector remained a major driver of retail sales growth. that's not surprising, as social activity normalizes following the reopening, but that growth has moderated. meanwhile, despite the government's tax exemption on the purchase of new energy vehicles, auto sales dragged on retail sales' performance after making positive contributions during the previous three months. encouragingly, household income growth is still rising, consumer sentiment has improved, and the surveyed unemployment rate has fallen from its peak of 5.7 percent in november 2022. we still expect the consumption recovery to continue, but it will be at a modest pace, with the key drag coming from the prolonged housing market downturn. that brings our attention to the real estate sector. the contraction in property investment deepened to-7.9 percent year-on-year in the first half of 2023, compared with-7.2 percent during the first five months. clearly, there remains a significant lack of property investment appetite, and the continued double-digit decline in housing starts does not bode well for the sector. heavily indebted chinese property developers continue to face difficulty raising funds. even the sale of distressed real estate assets at a discounted price has not attracted bidders. given the state of the housing downturn, it's hard to entice homebuyers back. recent policy communications have turned decidedly dovish, suggesting that authorities have likely become uncomfortable with the prolonged weakness in real estate and intensifying headwinds in manufacturing, all of which are likely to stymie the post-pandemic recovery in the second half of the year. the risk is that, in the face of lingering headwinds, the economy would continue to weaken without more macro policy support. to rejuvenate growth momentum, we think policymakers will cut the reserve requirement ratio and policy interest rates, boost state-driven infrastructure spending, and provide demand-side property policy easing. with inflation all but evaporated, there is likely room for the people's bank of china, the country's central bank, to ease rates. on this front, we already see some policy actions. the improvement in fixed-asset investment during june was largely state-driven, helping to offset the drag from private-sector investment. to relieve pressure on the real estate sector, authorities have recently extended the debt-repayment period for developers and propped up support for the completion of housing under construction. these property measures are likely insufficient to reverse the sector's fortunes for some time, but are clearly necessary to help stabilize it.
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