China think tank becomes first government-linked body to predict 2020 growth will drop below 6.0 per cent

National Institution for Finance and Development says China’s economic growth rate will slow to 5.8 per cent in 2020 from an estimated 6.1 per cent this year
This is at the bottom end of China’s target range of 6 to 6.5 per cent growth for 2019 and is in line with the International Monetary Fund

China economy

Frank Tangin Beijing

Published: 5:00am, 14 Nov 2019

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A Beijing-based think tank has become the first Chinese economic research institute linked to the government to predict that China’s economic growth rate will slow below 6.0 per cent next year.

The National Institution for Finance and Development (NIFD) on Wednesday said that China’s economic growth rate will slow to 5.8 per cent in 2020 from an estimated 6.1 per cent this year.

This is at the bottom end of China’s target range of 6 to 6.5 per cent growth for 2019, and further indicates the continued downward pressure on the economy from the trade war with the United States as well as domestic headwinds.

The economic slowdown is already a trend. We must resort to deepened supply-side structural reform to change it or smooth the slowdown, rather than solely rely on monetary or fiscal stimulus

Li Yang

“The economic slowdown is already a trend,” said former central bank adviser Li Yang, who heads the institute that is affiliated to the Chinese Academy of Social Sciences (CASS). “We must resort to deepened supply-side structural reform to change it or smooth the slowdown, rather than solely rely on monetary or fiscal stimulus.”

The institute’s forecast is in line with the International Monetary Fund, and indicates the challenge that policymakers face to achieve the above 6 per cent growth rate needed in 2019 and 2020 to reach the government’s goal of doubling gross domestic product in 2020 compared to its 2010 level.

According to the NIFD, China’s exports will be negatively affected for a long period amid the slowing global economy, private investment may be dampened by trade war uncertainties, while the effects of countercyclical policies will only begin to be evident in the first quarter of next year.

Li said the government’s fiscal deficit problem will stand out in the future, adding that the central government may have to issue more bonds to fulfil its expenditure responsibilities. This could demand more bond holdings by the central bank and better coordination and institutional arrangement between fiscal and monetary authorities.

“The macro control regime needs to be revamped,” he added.

China’s economy started to slow from 2011, with its growth rate already dropping to 6.0 per cent in the third quarter of 2019, the slowest rate since quarterly growth data was first published in 1992.

The continued slowdown has stirred market discussion over whether – and if so, how far – Beijing should loosen its policy stance to support growth, as has occurred in many developed countries, including the United States.

However, a continued rise in the nation’s debt level is reducing policymakers’ leeway. New NIFD data showed that the government’s macro leverage ratio – the total debt to gross domestic product – has recorded an “unsatisfactory” rise so far this year. Government leverage rose 0.7 percentage point to 39.2 per cent in the third quarter and climbed by a total of 2.0 percentage points in the first nine months of the year.

The country’s overall debt rose to 251.1 per cent of the national economic output at the end of the third quarter, up 1.6 percentage points from the previous quarter. The increase was led by the household sector, with debt rising 1.0 percentage point to 56.3 per cent in the third quarter.

Despite the rise in debt, the NIFD called for a bigger central government budget deficit to allow for more expenditure to support the economy. At the same time, additional efforts should be made to reduce the leverage of state-owned enterprises, in particular zombie enterprises and local government financing vehicles.

Zhang Xiaojing, deputy director of the CASS’ Institute of Economics, said the extent of the increase in leverage would depend on the growth rate that the government is trying to achieve.

“The pressure for economic stabilisation next year won’t be as big [as people think],” he predicted.

The NIFD warned of huge uncertainties over the trade tension between China and the US, while also predicting that the yuan exchange rate would fluctuate between 7.0 and 7.2 against the US dollar next year.

“The tariff war may be basically over in 2020, but the bilateral conflicts won’t end easily,” said Zhang Ping, its deputy director.

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