The world’s second-biggest economy may be stabilizing as policy makers cushion some of the slowdown with more supportive measures.
The Lunar New Year always makes the early months of the calendar year hard to interpret. Our Nowcast for China’s growth, however, has slipped a little. Still, in recent months, the government has taken further measures to shore up the cooling economy amid ongoing trade negotiations with the United States.
In early March, China lowered its goal for economic growth and announced a major tax cut, as policy makers seek to pull off a gradual deceleration while grappling with the trade standoff with the United States. In the annual economic report, Premier Li Keqiang set the gross domestic product (GDP) growth target for the year at a range of 6% to 6.5%. That compares with last year’s “about” 6.5% goal. The point is not so much the actual GDP growth number given the uncertainties around China’s accounting, but that Premier Li himself presented the report to the National People’s Congress. He has signaled how the government views the economy — that a slight slowdown is expected in 2019.
Supportive policy measures have continued to flow out of Beijing. The latest measures include the tax cuts, a reduction in corporate social security contributions, and an increase in local government bond sales to finance infrastructure projects.
Growth to stabilize
Overall, our view of China has not changed. We expect the downshift in growth to stabilize soon. This may already be happening, and we expect growth to stay in a narrow range for the remainder of 2019. Actual, realized growth is likely to pick up because of the policy stimulus in the pipeline. There may be some downside risk if the U.S. trade deal falls through or if it breaks down quickly because of perceived Chinese infractions.
Xi’s speech, presented before a hastily gathered assembly of local government officials, reinforced the hardline and centralized tilt of his administration.
There is also growing realization in Beijing of the constraints on policy. Dressed up in the Marxist lingo that fills pronouncements from officials of the Communist Party of China are clear warnings about the dilemmas facing policy makers and the difficulty of supporting growth while limiting leverage. If you add to the economic report the recent political commentary by President Xi Jinping, in which he stressed the importance of economic stability to prevent political upheaval and secure the position of the Communist Party, then it is clear that “limiting leverage” is the most vulnerable policy.
Xi’s speech, presented before a hastily gathered assembly of local government officials, reinforced the hardline and centralized tilt of his administration. He called for the tighter policing of the internet and a greater effort to ensure the youth in China do not drift into a looser interpretation of Marxism. However, the increase in centralization risks denying local government officials the flexibility they need to address the rising economic challenges.
Optimism surrounding trade deal
There are clear indications from Washington and Beijing that a trade deal is near. It appears the Chinese government is preparing to spin some concessions to the United States as measures that will help the business environment and thereby support the local private sector. It is also clear that President Trump has undercut Robert Lighthizer, the U.S. trade representative. But Lighthizer is an accomplished bureaucratic warrior, and he is not going to roll over easily. Our guess is that he is busy inserting into the text of the deal all sorts of phasing provisions with progress reviews and safeguards that will effectively turn the trade war not into a lasting peace, but into a set of minor ongoing skirmishes.
Any deal with China will provide some reassurance to markets and businesses and lift an important cloud. But the risk is that the issue won’t go away completely given the protectionist instincts of the Trump administration.