China economy needs new stimulus plan after November data disappoints, economists agree

Winter has arrived for the Chinese economy, with a series of activity data plunging to multi-year lows in November.

And the situation is only likely to worsen next year, as the full force of the trade war with the United States hits home, economists said.

Beijing is expected to introduce a more aggressive economic stimulus package early next year to help stabilise growth, but policymakers should pay more attention this time to the effects of their measures on the economy, as the steps they have taken since July to draw a line under weakening growth have not worked, the economists warned.

The Politburo, the nation’s top decision-making body led by President Xi Jinping, has shown more tolerance to slower growth by this time making no reference to “downward pressure” in the statement after its meeting on Thursday, instead repeating its intent to “stabilise” the economy – first muted in July – and build “a powerful home market” next year to offset the effects of external uncertainties from the trade war.

Most economic data for November released in the past two week has been extremely weak.

“[The data] showed the Chinese economy is unlikely to reverse its downward trend in the short term,” Shen Jinaguang, chief economist at JD Finance, told the South China Morning Post.

“It is hard to see any improvement [of the Chinese economy ]in the first half of 2019.”

A further deceleration after the decade-low rate of 6.5 per cent in the third quarter has also been suggested, with economists of Gao Hua Securities, Goldman Sachs’ Chinese partner, writing in their latest research note that “it is likely that [gross domestic product] year-over-year growth will moderate to 6.4 per cent [in the fourth quarter]”.

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Sun Binbin, fixed income analyst at Tianfeng Securities, wrote that the worst has yet to come for the Chinese economy.

The growth rate for industrial production fell to 5.4 per cent last month, the weakest pace since November 2008, according to data released by the National Bureau of Statistics on Friday.

This is likely the result of weakening foreign demand, as the year-on-year export growth rate slumped sharply to 5.4 per cent in November from 15.5 per cent in October, according to the customs data disclosed on December 8.

Foreign investment into China plunged 27.6 per cent in November from a year earlier, underscoring the impact of fragile business confidence due to concerns over the tariff battle between China and the United States.

Domestic consumer spending also lost momentum, as the country’s retail sales growth decelerated to 8.1 per cent last month, the lowest rate in 15 years, the latest figures from the National Bureau of Statistics showed.

Weak car sales were the main reason for the drop, as the country’s passenger vehicle sales dropped 18 per cent in November from a year earlier, according to the data published by the China Passenger Car Association on Monday.

The China Association of Automobile Manufacturers said they expected that the country's car sales would stop growing next year.

Beijing, though, tried to play down the poor performance highlighted in the November data.

“We cannot just focus on the monthly data of November in isolation, but should check the economy over a longer time frame,” Mao Shengyong, spokesman for the National Bureau of Statistics, told a media briefing on Friday.

“There is no doubt that China will achieve its growth target of 6.5 per cent this year.”

Achieving that target indeed seems likely, given that the economy grew by 6.7 per cent during the first three quarters of the year, but the bigger question remains the outlook for growth in the first part of next year.

Chinese policymakers will set a growth target for 2019 at next week’s Central Economic Work Conference in Beijing which begins on Tuesday, with a lower target widely expected.

Economist said that the Chinese economy will continue to slow in the short term, at least the first six months of next year, pushing Beijing to roll out more policy measures to boost growth.

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Shen of JD Finance said the central government should set a growth target of “around 6 per cent” for next year to leave them more room to manoeuvre.

“GDP growth may slip below 6 per cent in the first half of next year,” chief economist at GF Securities Shen Minggao said in an interview with the China Securities Journal published earlier this week.

Lu Ting, chief China economist at Nomura International in Hong Kong, wrote that the Chinese economy would experience a “significant slowdown” in the next six months, especially in the second quarter of 2019, due to the end of export front-loading, the cooling property sector and the weakness in business credit.

“Those who are overly bullish may be proven mistaken,” he wrote.

Beijing will introduce new stimulus policies in addition to using its traditional tools such as cutting banks’ reserve requirement ratio and increasing spending on infrastructure.

“Game-changing policies – such as substantial cut to the value-added tax, yuan depreciation and deregulation of big city property sectors – should help the economy bottom out,” Lu wrote.

Louis Kuijs, head of Asia economics at Oxford Economics, agreed that policymakers in Beijing will take further measures to support growth, including further tax cuts and reducing social security contribution rates.

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But China must be more careful on the size and intensity of its stimulus programme this time, he warned.

“Not to overdo it and not to jeopardise the achievements of the campaign to rein in credit growth continues to contain policy easing,” he wrote.

Standard Chartered chief China economist Ding Shuang also highlighted the government should be mindful of the side effects of excessive stimulus and that Beijing was likely to manage the stimulus dosage carefully.

Nomura International’s Lu added that it was crucial for Beijing to stick to market-based principles in setting its stimulus programme, or infrastructure investment could be counterproductive because many projects, such as undergrounds, would not make economic sense in lower-tier cities.