China economic health check may show slowing GDP growth in wake of trade war
With the country’s growth engines of investment, consumer spending and exports close to peak capacity, tariffs pose a big challenge for the Chinese leadership
The world will be watching for signs of what toll the US-China trade war has taken on the world’s second biggest economy so far when China releases its growth figures for the July-September quarter and other crucial financial data on Friday.
The numbers, to be released by China’s National Bureau of Statistics, will offer the first glimpse of the impact from the Trump administration’s tariffs on Chinese goods.
Economists polled by Bloomberg and Reuters are forecasting a median 0.1 per cent drop in GDP growth from the April-June period to 6.6 per cent – the lowest reading since the last quarter of 2008 when China’s growth tanked in the aftermath of a global financial crisis.
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The country’s headline year-on-year GDP growth figure, released quarterly, had fallen into a narrow zone between 6.7 and 6.9 per cent for the previous 12 quarters.
Analysts said a slight growth deceleration in the third quarter could be the start of a prolonged China growth slowdown, exacerbated by US President Donald Trump’s trade war, with all three engines of Chinese GDP expansion – investment, consumer spending and exports – close to peak capacity.
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If they are right, it will pose a big challenge for the Chinese leadership headed by President Xi Jinping, as a broad-based economic slowdown would amplify financial and social tensions in China.
In fact, Beijing has already tweaked its economic priorities to put debt reduction and even smog curbing onto the back burner.
Yi Gang, governor of the People’s Bank of China, said the deleveraging campaign had achieved initial success and the central bank was ready to act if necessary to help growth.
Robin Xing, chief China economist at Morgan Stanley, said at a briefing in Beijing on Monday that the Chinese government had already switched to a “defensive” policy mode with accelerated fiscal spending and moderate monetary easing to manage fallout from the trade war.
Xing said there were “downward signs and pressures” for China’s US$12 trillion economy and things could turn worse if Trump goes ahead with plans to extend tariffs on Chinese products.
“It may be a soft landing this year, but the real challenge will be next year,” Xing said.
In its latest global economic outlook report, the International Monetary Fund forecast a slowdown in China’s GDP growth to 6.2 per cent in 2019, with ongoing trade tensions with Washington hurting China more than the US.
While a growth rate of 6.6 per cent in this year’s third quarter would be within range of Beijing’s own target of “about 6.5 per cent”, it would look less healthy in US dollars – the yuan has weakened about 4 per cent against the dollar in the third quarter as a result of the trade war.
Washington fired the first shot in the trade dispute on July 6 with a 25 per cent additional levy on US$34 billion worth of Chinese products, and followed up with tariffs on a further US$16 billion of products a month later, with Beijing retaliating tit-for-tat each time.
On top of that, on September 24, the US added a 10 per cent tariff – rising to 25 per cent from next year – on another US$200 billion of Chinese imports. China hit back with its own tariffs, US$60 billion of US imports.
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According to China’s customs data, exports surged 14.5 per cent in September from a year earlier and its bilateral trade surplus with the US last month reached an all-time high of US$34 billion.
However, Xing at Morgan Stanley cautioned that the strong growth could be a result of “front-loading” by exporters rushing to ship goods before the tariffs kicked in.
Meanwhile, China’s growth pillars at home are showing signs of cracks.
Fixed asset investment, Beijing’s usual tool to drive up the economy, has slowed to a record low of 5.3 per cent in the first eight months of 2018, with few companies willing to put money down in a gloomy economic outlook. Compare that figure to a decade ago, when China’s fixed-asset investments were growing at more than 25 per cent.
While the Chinese government is speeding up bond issues to bolster growth via infrastructure investment, Beijing has repeatedly said it will not repeat the all-out stimulus of 2008, when undisciplined spending left the country with massive debt.
Chen Long, an analyst at Gavekal in Beijing, believes Beijing’s moves, including the release this month of US$110 additional liquidity into the banking system, are aimed at “stabilisation rather than stimulus”.
In further bad news, growth in retail sales, a barometer of consumer spending, has slowed to single-digits in recent months despite Beijing’s expectations that China’s 1.4 billion consumers would help the country weather the slowdown.
Zhou Hao, a senior economist of Commerzbank in Singapore, said the Chinese economy was already in a cyclical downturn and the escalated trade friction with the US had darkened people’s expectations for the future.
“The expectations on consumption [to help lifting growth] may be too high,” Zhou said, adding that China’s consumers may have already “overspent” in the years of surging household debt and a booming economy, when easy money and quick wealth had been widespread.
Capital Economics, a London-based research firm, went a step further, saying the real situation of the Chinese economy could be bleaker than suggested by the official data, as the statistics bureau had a track record of “adjusting” official figures to make them look good.
“You can’t see much of a slowdown in the official data and probably won’t over the quarters ahead either,” its chief economist Neil Shearing wrote in an advice note.
According to Shearing, Capital Economics’ in-house indicator shows China’s growth had already slowed “from 6 per cent a year ago to 5 per cent now”.