Beyond the Trade War, China’s Economy Is Struggling to Stabilize
China is grappling with a slowdown that will see output growth slide to the weakest pace in almost three decades this year, as factors far beyond the trade war with the U.S. weigh on the world’s second-largest economy.
Gross domestic product is forecast to grow at 6.2% in the second quarter, the slowest in a three-month period since at least 1992. Data due for release Monday morning in Beijing will show whether the downward forces from external demand, deflationary factory prices and contracting manufacturing can be offset by stabilizing investment, brighter consumer sentiment and a rebounding property sector.
The chances for those green shoots to hold on and expand into a firmer recovery depend in turn on how well the government’s targeted stimulus policies can lift local production and counteract the trade war’s effects. The U.S. Federal Reserve’s path toward imminent rate cuts is handing China more room to make its own monetary policy easier, just when it needs it.
“China’s economy will slow further in the second half as external demand remains the biggest drag, and it’ll likely stabilize from there under policy support,” said Wang Tao, chief China economist at UBS AG in Hong Kong. “The annual growth rate will stay above 6%.”
Data released Friday in Beijing confirmed the picture of weak domestic demand, the negative impact of the tariff war — and the chance that stimulus measures aimed at fostering credit may put a floor under the slowdown. Export growth slowed, imports slumped, while credit expansion held up.
As China’s population ages and the economy transitions from the double-digit growth rates of the mid-2000s, policy makers are attempting to manage the path down, while curbing debt and fending off mass industrial unemployment. Those efforts can be seen in three key sectors:
How strongly fixed-asset investment growth can pick up is key. More specifically, infrastructure investment will have to do the heavy lifting, as manufacturers who continue to be pressured by the tariff threats and a fragile global economy are hesitant about new investment.
Economists including those at UBS AG, Australia & New Zealand Banking Group Ltd. and Morgan Stanley expect infrastructure investment growth to continue to gradually accelerate this year.
A fiscal stimulus plan including about two trillion yuan ($291 billion) of tax cuts is slowly feeding through into the economy. The government has stepped up efforts recently, easing the rules for using government debt in some infrastructure projects and pledging to renovate hundreds of thousands of old buildings. The relaxation of the use of government debt can increase investment by 800 billion yuan to 1 trillion yuan, according to UBS’s Wang.
A leading indicator of infrastructure investment — excavator sales — was basically flat in June after falling in May. That sign of stabilization “bodes well for investment activity and economic growth over the second half of 2019,” Xing Zhaopeng And Betty Wang at ANZ wrote in a note.
What Bloomberg Economists Say
The data due Monday will highlight an economy under continued pressure, with investment likely to remain sluggish and industrial output growth to slow. The most worrying sign from the June trade data released Friday was another month of undershoot in imports, which underscores weakness in domestic demand.
— Chang Shu and Qian Wan, Bloomberg Economics
China needs its masses of middle-class consumers to help drag it out of a trade-induced slump. This year though, auto sales and property-related consumption such as home appliances have been among the main drags on weak retail sales, and there aren’t clear signs of recovery yet in those sectors.
Passenger-car sales posted the first increase in June in more than a year as dealers offered heavy discounts, yet economists remain cautious on how long the recovery can be sustained. ING Bank NV’s Iris Pang said the auto industry will continue to face challenges from both “technological disruption from the ride hailing apps” such as Didi as well as cyclically slowing growth.
Policy makers are trying to keep a tight lid on the property sector, always a candidate for runaway asset prices. Property development investment has stayed stable this year, and regulatory curbs mean that growth will stay within bounds.
The country’s banking regulator has asked trust companies with fast-growing businesses in the real estate sector to control the pace of expansion and manage risks better, Xinhua News Agency reported. The People’s Bank of China has also requested banks to not lower mortgage rates further, despite easier monetary conditions.
In a scenario where the trade war negotiations fall apart and tariffs on all of China’s exports again appear on the horizon, the property and auto sectors will be where policy makers try to buffer the economy, according to Lu Ting, chief China economist at Nomura Ltd. in Hong Kong.
“Beijing will likely roll out more real stimulus measures such as cutting purchase tax for passenger cars and forcing major cities to ease auto license quotes,” he said. Earlier stimulus measures that had been mothballed “will likely be put back on the table in the case that U.S.-China trade tensions escalate further.