China economic growth prospects gain momentum following trade war deal, but scepticism remains

A growing number of forecasts for Chinese economic growth next year are upbeat after Beijing reached a phase one trade deal with Washington last week, though some analysts say domestic headwinds will continue to weigh on the economy.

The International Monetary Fund (IMF) is the latest to voice optimism about growth prospects, with managing director Kristalina Georgieva saying the bilateral agreement that will halt the introduction of new tariffs and lower some already in place could boost expansion to about 6 per cent next year, up from its October projection of 5.8 per cent.

Georgieva applauded the just-concluded trade deal as a “very positive step” for both countries and the global economy, but called for continued discussions on broader policy issues.

“To sustain the positive impact for the world, we need to go from trade truce to trade peace,” the Bulgarian economist was quoted as saying in an interview with Chinese business magazine Caixin on Monday.

An official upgrade of the IMF forecast is expected to be announced in mid-January when the Washington-based institution releases its updated World Economic Outlook.

Earlier this week, Oxford Economics raised its growth forecast for 2020 to 6 per cent from 5.7 per cent, following the trade deal and signs of stabilisation in Chinese industry. “We expect the government will set an official growth target of ‘about 6 per cent’ and we don’t expect a significant policy easing in 2020,” its head of Asia economics Louis Kuijs said.

Morgan Stanley also cited November’s surprise rebound in industrial production and infrastructure capital expenditure as good news for growth prospects.

“With the announcement of a trade deal, we now have greater conviction that the Chinese economy is on a mini-cycle recovery path in 2020,” the American multinational bank said in a note.

China’s growth slumped to 6 per cent in the third quarter of 2019, its lowest pace in nearly three decades, and a number of private sector analysts are still sceptical about the outlook for the world’s second largest economy.

Nomura’s chief China economist Lu Ting warned that growth has yet to hit bottom and the acceleration in November industrial production and retail sales was “more likely noise than a trend”.

Neil Shearing, chief economist of London-based Capital Economics, said that domestic headwinds will continue to weigh on growth next year, causing it to slow further.

“The trade war is likely to move to a new phase over the course of next year, in which the focus shifts away from tariffs and towards a broader set of issues like technology, industrial policy and security. US-China decoupling will nonetheless continue,” Shearing said.

Beijing is determined to double gross domestic product and per capita income next year from a decade earlier as part of a pledge to create a well-off society. This requires expansion of more than 5.8 per cent.

The government is widely expected to set a 2020 growth target of “around 6 per cent”, while authorising a larger fiscal deficit and higher local government special purpose bond issuance to fund infrastructure investment and support growth.

At the same time, there is rising hope that President Xi Jinping will roll out landmark reforms next year, the deadline to fulfil goals for dramatic market liberalisation outlined in a communique following the third plenum. That document promised that market forces would play a “decisive” role in resource allocation in the economy and detailed 336 specific tasks to accomplish the objective.

“The phase one deal between China and the US has created conditions for further opening-up,” Shen Jianguang, chief economist at JD Digits, said at a media briefing on Tuesday. “2020 will be an important year for reforms.”

He expected reforms allowing the transfer of rural land, as well as fiscal and tax system changes that will reduce local government reliance on land sales to generate revenue.

At the insistence of the United States and Europe, Beijing has increased access to its financial markets this year, allowing Wall Street banks and brokerages to take control of their Chinese joint ventures and expand the scope of their business. Foreign carmakers will also be able to seize control of Chinese joint ventures from next year.

However, Washington’s demand for substantial “structural reform”, including scaling back subsidies given to state-owned enterprises and state-led industrial policies that give preference to domestic firms over foreign companies, has not been fully addressed.

These thornier issues are expected to be at the heart of a so-called phase two trade deal, which US President Donald Trump has said would start soon.

Xu Hongcai, a senior fellow at the China Association of Policy Science, said Beijing will establish its own timetable for biting the “hard bone” of reform.

“The US has always put pressure on [the need to end] implicit subsidies for state-owned enterprises. We must pay great attention to this,” he said. “Industrial policies should be oriented toward fair competition, and the government should reduce subsides as much as possible.”