China’s 2020 growth could exceed 6 per cent if US trade tensions ease, analysts say

China’s growth next year could reach 6 per cent, or even exceed it, if trade war tensions with the United States de-escalate in the near future, some private sector economists now say.

China’s relatively stable job market, and the support it provides to the outlook for consumer spending, has given Beijing confidence it can take a very deliberate approach to increasing stimulus measures to help economic growth.

This confidence makes it likely that Beijing will set its growth target for 2020 at around 6 per cent, even though many private forecasters are projecting a growth rate next year below 6 per cent in the absence of further significant stimulus, some analysts said.

Liu Xuezhi, a senior researcher with the Bank of Communications, said Chinese growth could come in “around 6 per cent” next year, with the outlook for trade negotiations determining the extent to which growth will be above or below that figure. Growth of 6 per cent remains a relatively high rate compared to other economies and a small deviation from that level “won’t have an obvious impact on peoples’ daily lives,” he added.

Morgan Stanley economists are predicting in their baseline scenario – which assumes China and the US sign their “phase one” trade deal and some tariffs are rolled back – that China’s growth will bottom out at 5.9 per cent in the fourth quarter and experience a modest recovery next year, with full-year average growth rate of 6.0 per cent.

In the worst case scenario – where trade war tensions increase – China’s growth rate could slip to as low as 5.3 per cent next year, according to the Morgan Stanley research led by chief China economist Robin Xing. The best case scenario, marked by further improvement in trade relations, could see growth rise to 6.4 per cent.

Whether consumer confidence recovers will also be vital to the pace of consumer spending, which is a key factor in the growth outlook since it accounted for 60.5 per cent of growth in the first three quarters of this year.

Beijing has lowered personal income taxes and rolled out consumer subsidies to boost consumption, but the growth of retail sales during the first 10 months of the year still slowed to 8.1 per cent from 9.2 per cent a year earlier.

“Households have preferred to save rather than spend their tax savings amid trade tensions and job market uncertainty. We believe this could reverse with restored consumer confidence,” Morgan Stanley said.

The outlook for the job market will be an important element in the outlook for consumer spending.

Employment is widely seen as China’s Achilles' heel, given its implications for ensuring social stability, the government’s top priority. US President Donald Trump said on Twitter last summer that China had lost millions of manufacturing jobs since the start of the trade war in July 2018, adding Beijing wanted to reach an agreement because “their supply chain is going down the tubes”.

“Unemployment is certainly rising amid the economic slowdown, but it won’t be a big problem,” said Larry Hu, chief China economist of Macquarie Capital in Hong Kong.

“Unlike the US, where the labour market is closely tracked, there’s no complete data set that reflects the real employment situation,” he said. “Empirical studies show employment is far different from 2008 [during the global financial crisis], and better than 2015 [after the domestic stock market crash and economic slowdown] when the macroeconomic challenges were more severe than now.”

The current economic slowdown is “not bad enough” to justify larger economic stimulus, Hu said, but Beijing’s policymakers would closely watch three indicators – the growth rate in relation to its target, corporate profitability and local fiscal conditions – to assess the necessity of doing more to support growth.

China’s registered unemployment rate was 3.6 per cent in the third quarter, down from 3.8 per cent a year earlier, while the surveyed rate in 31 large cities rose to 5.1 per cent in October from 4.7 per cent a year earlier, according to the National Bureau of Statistics.

But government data does not reflect the whole picture because a majority of migrant workers, some 288 million people at the end of 2018, are not included in government figures. The data also fails to take into account the quality of jobs, measured in terms of security and income growth, or in relation to high home prices and runaway pork prices.

Other indicators, including the employment subindex of the privately run Caixin manufacturing purchasing managers’ index, and the China Employment Market Prosperity Index co-developed by Renmin University of China and Zhaopin.com, are often used as references.

Years of economic adjustment – during which service sector jobs rose significantly while manufacturing positions declined rapidly – were a prime cause of the economic slowdown, but also mitigated the unemployment threat from weaker growth, said Liu.

“We should pay more attention to structural unemployment,” Liu said. “Some people losing their jobs in traditional manufacturing sector are finding it difficult to be hired in the service sector.”

The significance of defending a specific growth threshold to ensure adequate employment was frequently cited by China’s government in the past. Former Premier Wen Jiabao, who rolled out the government’s massive four-trillion-yuan (US$570 billion) stimulus programme after the global financial crisis when millions migrant workers lost their jobs at coastal factories in 2008, said at the time growth of at least 8.0 per cent was needed to create 10 million jobs.

But slower growth has not meant a sharp decline in employment during the current economic slowdown. China created 10.97 million jobs in the first three quarters of this year, effectively meeting its full-year target of creating 11 million new positions, government data showed.

Even so, the government is fully aware that it cannot let down its guard on the jobs market outlook.

Speaking at a symposium with provincial governors last week, Premier Li Keqiang acknowledged the current pressure on employment and ordered local governments to provide additional support for returning migrant workers who had lost their factory jobs in coastal cities.