China’s economy to brace for slower growth pace as trade war with United States takes its toll
China’s economy, which grew in the third quarter at the slowest pace in a decade, is likely to slow further in the coming months as the ongoing trade war with the United States takes its toll.
That would put pressure on the Chinese government to refresh its policies to bolster confidence, stabilise growth and stimulate investments, analysts and economists said.
“As the tariff war continues to escalate, [the] impact on business sentiment will be negative,”
said HSBC’s Greater China economist Julia Wang. “Further fiscal policy easing, particularly in the form of tax cuts, will be useful towards anchoring corporate expectations.”
Gross domestic product increased by a slower-than-expected 6.5 per cent in the third quarter from a year earlier, down from 6.7 per cent in the second quarter, according to data released on Friday by the statistics bureau in Beijing. That would be the slowest quarterly growth pace since the global financial crisis a decade ago.
The deceleration came even as exports increased in the third quarter, as US importers front-loaded their orders to minimise the impact of trade tariffs. But when this pre-Christmas order surge subsides later this year, Chinese exports, and the activity of manufacturers making those products, could slow substantially, economists said.
Other figures released on Friday provided additional evidence that the Chinese economy had slowed.
In September, industrial production slowed to 5.8 per cent, down from 6.1 per cent in August and the slowest growth rate since October 2015.
Fixed-asset investment remained weak, with the January-September growth rate rising only modestly to 5.4 per cent from the 5.3 per cent rate posted in the first eight months of the year. Property investment slowed to 9.9 per cent, from 10.1 per cent, while infrastructure investment growth slowed to 3.3 per cent from 4.2 per cent despite the government’s new campaign to promote such spending to support growth.
China would focus on steadying infrastructure investment and property investment going forward, said Betty Wang, Greater China Senior Economist for ANZ. In addition, the People’s Bank of China could cut the amount of money that banks are required to hold at the central bank for the fifth time this year, freeing up more money to lend. The government could cut taxes targeting small and medium-sized firms as well as exporters, she said.
Retail sales growth did accelerate, to 9.2 per cent in September from 9 per cent in August, but remained well below the growth rates above 10 per cent posted in recent years.
Chinese consumers, concerned about their personal finances and the outlook for the economy, have been very cautious about their discretionary spending, which the government is counting on to help stabilise growth.
To be sure, these are signs that China’s economy is adjusting to a structural transformation from an exports-driven economy to one that is led by consumption, Vice-Premier Liu He said today in an interview conducted with the Communist Party’s mouthpiece newspaper People’s Daily.
One culprit for slowing growth is the government’s continued campaign to cut debt and financial leverage in the economy, which has sharply curtailed financing channels for small private businesses and consumers.
In September, total outstanding credit in the Chinese economy rose 10.6 per cent compared to the previous year, down from 10.8 per cent in August and a new all-time low growth rate, the People’s Bank of China reported on Wednesday.
Bank lending growth was steady – rising slightly to 13 per cent from 12.9 per cent – but shadow banking financing continued to contract sharply. It is these non-traditional financing channels that small and medium-sized private businesses – and increasingly, consumers – rely on to get financing, as they often do not qualify for traditional bank loans.
Without the non-traditional sources of financing, many Chinese business were struggling, even before the on-set of the trade war.
Analysts do not expect the full impact of the trade war to show up until 2019 and forecast Beijing will introduce more targeted policies, rather than a large scale stimulus plan, aimed at stabilising growth.
“I don’t think we will see the impact of the trade war in the coming [fourth] quarter because of the depreciation of the yuan and advanced orders from importers,” said Banny Lam, head of research at CEB International Investment. “The effect of the trade war on China’s trade numbers is likely to be very obvious in the first two quarters of next year if the US does lift the tariff from 10 per cent to 25 per cent” as it was expected to do, he said.
The risks of a major slowdown in the economy will be higher next year, according to Larry Hu, head of China economics at Macquarie, who estimated that the Chinese economy could slow to 6.2 per cent in 2019, forcing policymakers to set a lower growth target for next year.
“Given the 6.5 per cent GDP growth in 3Q18, which is in line with the [growth] target this year, it’s still premature for stimulus to escalate,” he said in a note.
“But the recent speech by the central bank governor Yi made it clear that a benchmark rate cut is an option for the central bank.”