THE WORLD BANK, never a Pangloss among economic forecasters, has scaled back its growth forecasts for China in the newly published edition of its Global Economic Prospects.
It now expects 5.9% GDP growth for this year. If that proves correct, it will be the first time growth will have fallen below 6% in three decades. The forecast is a 0.2 percentage point cut from the one the Bank made last June. It sees growth coming in at 5.8% in 2021, and 5.7% in 2020 as the rebalancing of the economy continues.
There is more to it, of course, that planned structural change and a managed slowdown of the growth rate. Heightened trade tensions with the United States have chilled the global economy, causing Chinese domestic demand to decelerate more than the Bank had previously expected.
The contraction in exports to the United States has tightened, even though, as the Bank puts it, ‘shipments to the rest of the world have been somewhat more resilient’. However, imports weakening more than exports and industrial production falling to multiyear lows point to a broader slowing of domestic demand beyond trade.
Authorities have countered this with more accommodative monetary policy, mainly by cutting bank reserve requirements, even though regulatory tightening to lessen the debt risks in non-bank lending has continued. They have also resorted to fiscal measures, such as tax cuts, and support for accelerated public investment spending at the provincial and municipal government level.
However, the fact that total debt has surpassed 260% of GDP but the share of non-bank lending has continued to decline shows how Beijing is walking a fine line between keeping growth going while still seeking to de-risk the financial sector.
The high and rising stock of private debt in an increasingly complex and interconnected financial system is seen by the Bank to be China’s primary vulnerability:
Rising defaults in local banks or in the shadow banking system, a collapse in property prices, or large capital outflows alongside a sharp adjustment in asset prices could all ripple through the highly leveraged financial system. This risk is only partly mitigated by the country’s low reliance on external financing and ample capacity for fiscal and monetary support.
The Bank also makes a justified nod in the direction of the long-term slowdown in labour productivity (far from a uniquely Chinese problem), but it is the external headwinds that are most buffeting the economy. As the Bank notes:
A permanent and lasting resolution of trade disputes with the United States that builds upon recent progress could bolster China’s growth prospects and reduce reliance on policy support.
True, in as far as it goes, but as the Bank readily admits, the risks remain tilted to the downside.