China’s Growth Continues To Slow As Expected

THE QUESTION ABOUT the economy is not whether it is slowing, which it has been for many years as authorities manage the rebalancing of the economy, but whether the pace of the deceleration has suddenly picked up to a point where it threatens domestic stability.

The latest official figures show that last year, the economy expanded by 6.6% year-on-year, down from 6.8% in 2017 and its slowest since 1990. It grew by only 6.4% in the three months to December as tariffs, uneven domestic demand and a slowing global economy started to bite.

This was all much as expected and had already been reflected in contractions in December’s trade data and factory activity gauges. It does, though, add urgency to Beijing forestalling the imposition of further US tariffs at the end of the ‘trade truce’ next month.

The 2018 annual growth figure is in line with the official target, again, and again will raise questions about the accuracy of the GDP number. Some unofficial estimates put growth at two-thirds the level of the official figure.

However, wherever the exact number lies — and in this Bystander’s view, it is closer rather than farther from to the official number — the direction of travel is clear.  The new official target for this year, believed to have been agreed by the leadership and likely to be announced in March, is likely to reflect that — somewhere just north of 6%.

The policy response is a limited stimulus shaped in many respects by the need to continue deleveraging the economy. There will not be old-school large-scale infrastructure investment. Instead, Banks’ capital reserve requirements are being cut, as are some 2 trillion yuan ($290 billion) worth of taxes and import duties, notably value-added tax and local authorities are being given scope to issue a similar volume of bonds to finance construction spending without adding to tomorrow’s potential bad bank debt.

While this is a modest version of a previously used approach, the difference is that banks are being encouraged to lend to the private sector rather than being instructed to lend more to state-owned enterprises. Over the next three years, banks are expected to increase their lending to private companies to about one-half of total loans from the current one-quarter, in the hope that will prevent politically unacceptable job losses.

The gamble with this strategy is that the availability of funds to borrow does not mean that companies will take out loans, as was seen with quantitative easing in Western economies after the great financial crisis of 2018. Thus job creation and underemployment will be similarly slow, which will become the political stability risk for authorities to manage.