Tag Archives: GDP growth

China’s First-Quarter Growth Lays Base For Hitting 2019’s Target

FIRST-QUARTER GROWTH came in slightly better than expected at 6.4% (consensus estimates were for 6.3%), and unchanged from the final quarter of 2018, confirming that the targeted stimulus applied since the second half of last year is taking effect.

The combination of fiscal and monetary measures helped boost industrial production in March by 5% year-on-year and retail sales by 8.7%. Fixed asset investment increased by 6.3%.

Beijing is targeting growth for the year at between 6% and 6.5%.

The challenges remain balancing growth with deleveraging and the prospect of a slowing global economy. The outcome of the trade talks with the United States is the wildcard.

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IMF Sees No Reasons For China’s Economy Not To Stop Slowing

A chart showing China's slowing GDP growth trajectory, 2010-2024. Source: IMF, Bystander Media

The IMF’s CHANGE in its forecasts for China’s growth this year and next go in opposite directions to those for the global economy as a whole.

In the new edition of its World Economic Outlook, The Fund projects 6.3% GDP growth this year and 6.1% in 2020. That is a one-tenth of a percentage point increase and reduction respectively on the Fund’s forecast in January, which in turn was unchanged from its forecast last October. However, for the world economy, it has cut its projections for this year but sees faster expansion in 2020.

The upgrade to the China forecast for this year is in large part technical. The Fund has dropped the assumption made in its previous forecast that the US tariff rate on $200-billion worth of trade would rise as threatened by the Trump administration to 25% from 10%.

China’s growth had started slowing in the second half of 2018 as a result of the measures to deleverage and rein in shadow banking, and the increase in trade tensions with the United States. At the same time, the consequent slower domestic investment was accompanied by softening consumption, particularly for cars, whose sales declined with the ending of incentive programs. The economy expanded by 6.8% in the first half of 2018, but by only 6.0% in the second.

For this year, the Fund expects economic conditions to improve as stimulus kicks in. Nonetheless, the external environment will be challenging: the advanced economies are slowing down; trade tensions with the United States are likely to persist regardless of any deal being struck in the near future, and there is likely to be a gradual tightening of financial conditions consistent with some further removal of monetary policy accommodation by the US Federal Reserve.

Even assuming no further increase in tariffs and a continuation of fiscal stimulus by Beijing, China’s economic growth is projected to slow this year and into next as the underlying forces that slowed growth in the second half of last year persist.

Longer term, the Fund sees a gradual slowing of the economy to 5.5% annual GDP growth by 2024. This is assuming the successful continuation of rebalancing towards a private-consumption and services-based economy and of the authorities’ actions to slow the accumulation of debt and mitigate its associated vulnerabilities.

This Bystander has less confidence in the second assumption than in the first. Cuts to personal income tax and value-added tax for small and medium enterprises should help stimulate domestic consumption. However, authorities also eased back on deleveraging and injected liquidity through
cuts in bank reserve requirements.

Any excessive stimulus to support near-term growth through a loosening of credit standards or a resurgence of shadow banking activity and off-budget infrastructure spending would heighten financial vulnerabilities — another reason that President Xi Jinping may be anxious to secure a deal with US President Donald Trump sooner rather than later.

If no deal is reached with the United States, that will cast a dark shadow over the medium-term outlook.

The Fund acknowledges that some centrally financed on-budget fiscal expansion in 2019 may be appropriate to avoid a sharp near-term growth slowdown that could derail the overarching reform agenda. However, it says this should avoid large-scale infrastructure stimulus and instead “emphasize targeted transfers to low-income households so as to lower poverty and inequality”.

It also lays out its familiar shopping lists of structural reforms:

Reducing leverage in the economy will require:
⁃ continued scaling back of widespread implicit guarantees on debt;
⁃ early recognition and disposal of distressed assets; and
⁃ fostering more market-based credit allocation that better aligns risk-adjusted returns with borrowing costs.
Continued rebalancing will require:
⁃ a more progressive tax code;
⁃ higher spending on health, education, and social transfers; and
⁃ reduced barriers to labour mobility.
Enhancing productivity growth will require:
⁃ reducing the footprint of state-owned enterprises; and
⁃ further lowering barriers to entry in certain sectors, such as telecommunications and banking.

As an endnote, the World Economic Outlook devotes a whole chapter to the link between bilateral trade tariffs and trade imbalances, and questions whether bilateral trade imbalances can (or should) be addressed using bilateral trade measures. Its conclusion is a rebuff to US President Donald Trump’s stated intention of using tariffs to cut the US trade deficit with China. It concludes that:

Targeting bilateral trade balances will likely only lead to trade diversion, with limited impact on country-level balances. The findings of this chapter help explain why, despite the tariff measures, the US trade deficit is the largest it has been since 2008. The chapter also establishes that the negative impact of tariffs on output is significantly higher today than in 1995 owing to the bigger role of global supply chains in world trade.

The paradox is that Trump’s tariffs will not achieve their stated aim of achieving balanced trade and have imposed a cost on US manufacturers and farmers, bu have got Beijing to the table to negotiate over structural reforms to its development model that it has never been prepared to talk about before.

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IMF Sees China Slowdown As Only One Reason To Be Gloomy

THE INTERNATIONAL MONETARY Fund tags a greater-than-envisaged slowdown in China as one of the triggers beyond escalating trade tensions that could cause it to become even gloomier about global growth prospects.

In the latest update to its World Economic Outlook, the Fund has cut its October forecasts for global growth this year and next by 0.2 of a percentage point and 0.1 of a percentage point to 3.5% and 3.6% respectively.

For China specifically, the Fund says that, despite fiscal stimulus that offsets some of the impacts of higher US tariffs, its economy will slow due to the combined influence of needed financial regulatory tightening and trade tensions with the United States.

A resumption of the ramping up of US tariffs after the March 1 expiry of the truce in the two countries’ trade dispute — and with it, presumably, retaliatory tariffs against the US on Beijing’s part — is one self-evident risk.

However, the Fund is holding to its October forecast of 6.2% growth in China in both 2019 and 2020. That will be down from this year’s 6.6%.

In detail, it says:

China’s economy slowed in 2018 mainly due to financial regulatory tightening to rein in shadow banking activity and off-budget local government investment, and as a result of the widening trade dispute with the United States, which intensified the slowdown toward the end of the year. Further deceleration is projected for 2019. The authorities have responded to the slowdown by limiting their financial regulatory tightening, injecting liquidity through cuts in bank reserve requirements, and applying fiscal stimulus, by resuming public investment. Nevertheless, activity may fall short of expectations, especially if trade tensions fail to ease. As seen in 2015–16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure.

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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.

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World Bank Sees China’s GDP Growth Continuing To Decelerate

ECONOMIC GROWTH IS expected to decelerate to 6.2% this year from an estimated 6.5% in 2018, and trend towards 6% thereafter, according to the new edition of the World Bank’s Global Economic Prospects.

The Bank cites weaker exports amidst elevated global trade uncertainty as the main cause of the slow down, although domestic demand is seen as remaining robust as policy boosts consumption. The impact of higher tariffs as a result of the US-China trade dispute, the Bank expects, will be offset by fiscal and monetary stimulus.

The risk is that propping up growth will slow the necessary work of deleveraging the economy.

As the Bank notes:

New regulations on commercial bank exposures to shadow financing, together with stricter provisions for off-budget borrowing by local governments, have slowed credit growth to the non-financial sector. However, in mid- and late 2018, the authorities reiterated their intention to pursue looser macroeconomic policies to counter the potential economic impact of trade disputes with the United States.

Four key charts from the report:

A screenshot of four World Bank charts on China's economy.

And six more:

Six charts from the World Bank Global Economic Prospects report, January 2019

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Latest China GDP Figures Show Stable But Challenged Growth

Screen Shot 2018-10-20 at 10.44.23 AM

IF THERE IS a scintilla of concern for authorities in the third-quarter GDP growth figure, covering July-September, it is that the tariffs imposed by the United States have not had much time to have a material impact.

At 6.5% year-on-year, the third-quarter number represents the slowest quarterly growth rate since the first quarter of 2009 in the immediate aftermath of the 2008 global financial crisis. However, it is still in line with the official growth target for the year. For the first nine months, GDP grew at an above-target 6.7%, according to the National Bureau of Statistics, which generally portrays the economy as “running within reasonable range in the first three quarters, and [continuing] to stay stable with good growing momentum”.

However, as the economists like to say, all the risks are on the downside: Trump’s tariffs; the ticking debt time bomb; and the pains of rebalancing.

In particular, with the Trump administration ramping up its tariffs in the current quarter and no resolution to the trade frictions between the two countries in sight, further policy support for the economy is going to be needed. However, policymakers’ scope to stimulate the economy is limited by high debt levels, in part taken on to finance the infrastructure investment boom that was the stimulative response to the 2008 financial crisis.

Giving banks more freedom to grow their loan books, trusting their credit judgements are better — or less politically swayed — than they have been in the past, will be preferred to increasing direct government spending. There will some of that, though, too, if growth is seen as slowing uncomfortably fast once the current round of US tariffs takes effect, or is followed by another.

Investors are less than convinced. Hence the raft of bullish statements from President Xi Jinping’s top economic adviser and the heads of the securities regulator, the combined insurance and banking watchdog and the central bank urging investors to stay calm as the main stock market index neared a four-year low.

However, the important words are yet to be spoken. Those will exchanged between Presidents Xi and Donald Trump when they meet at the G20 leaders’ summit in Buenos Aires at the end of November and may give an indication of which direction the trade disputes between the two countries are headed in.

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Trade Tension And A Less Certain Outlook Cloud China’s Economy

THE INTERNATIONAL MONETARY FUND has held its growth projections for China unchanged even as it warned of growing downside risks to the global outlook.

The newly published July update to its World Economic Outlook puts its forecast GDP growth at 6.6% for this year and 6.4% for next. It cites softening world demand and regulatory and financial tightening as the reasons why.

The Fund’s forecast is in line with official figures for the second quarter released today by the the National Bureau of Statistics showing the economy growing by 6.7% year-on-year in the second quarter, the twelfth consecutive quarter of 6.7-6.9% growth.

Rebalancing, evidenced by private and public consumption contributing a record 78.5% of January-June GDP growth, continues as does excess-capacity reduction; mining sector output grew by at less than a quarter of the pace of overall industrial output.

Net export volumes shaved 0.7 of a percentage point off first-half growth as exporters and importers raced to beat the imposition of US tariffs. The effect of those are likely to be felt more severely in the second half of this year.

For its part, the IMF notes:

The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment.

To trade tensions, the Fund adds rising US interest rates and commodity prices, notably oil, as among the most concerning downside risks to the global economy.

The Fund’s prescription that ‘avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion’ may find more resonance in Beijing that Washington these days, as will its call to preserve global economic integration under an open, rules-based multilateral trade system.

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