China’s economic growth cooled to its slowest pace since the global financial crisis in the third quarter, with regulators pledging further policy support as a years-long campaign to tackle debt risks and the trade war with the United States began to bite. The socialist market economy of the People’s Republic..
China’s economic growth cooled to its slowest pace since the global financial crisis in the third quarter, with regulators pledging further policy support as a years-long campaign to tackle debt risks and the trade war with the United States began to bite.
Background
The socialist market economy of the People’s Republic of China is the world’s second largest economy by nominal GDP. Since initiating market reforms in 1978, China has shifted from a centrally planned to a more market-based economy, experiencing rapid economic and social development. GDP growth has averaged nearly at 10% a year and has lifted close to 800 million people out of poverty. A hub for the manufacturing industry, China is the fastest growing economy.
With a population of 1.3 billion, the Chinese economy is playing a crucial and influential role in the development and in the global economy. China has been the largest single contributor to world growth since the global financial crisis of 2008. However, China’s success in escaping the Great Recession is attributable to its bold and powerful 4 trillion renminbi stimulus package launched in late 2008. In particular, China was the first major economy to recover from the financial Tsunami. GDP growth in China rebounded to its double-digit pre-crisis rate in late 2009 (at 11.4% per year), less than one year after unveiling its stimulus package, and it rose significantly above its long-run average in the first quarter of 2010 (at 12.2% per year).
Analysis
Sputtering growth, soaring debt and an escalating trade war with the United States are increasingly weighing on China’s economy. China’s government on Friday reported that the economy grew by only 6.5% over the three months that ended in September compared with a year ago. While fast by global standards, the pace is China’s slowest since early 2009, during the depths of the global financial crisis.
“China’s slower but still strong headline growth masks rising domestic and external vulnerabilities that are likely to presage a further growth slowdown in the absence of concerted policy measures,” said Eswar Prasad, professor of trade policy at Cornell University in the US.
The Chinese economy has lost momentum this year following government efforts to try to rein in high levels of debt. It has also started coming under pressure from US tariffs on more than $250 billion of its exports. Chinese officials have turned to tax cuts, infrastructure spending and looser monetary policy as they seek to prop up growth. The country’s stock markets and currency have been pummelled in recent months by fears about the economy and the impact of the trade war.
The Trump administration plans to raise tariffs on $200 billion of Chinese goods from 10% to 25% at the end of the year. Also, in the coming quarters, Trump intends on expanding tariffs to effectively cover all Chinese exports to the United States, which topped $500 billion last year. China’s exports grew strongly in September, but analysts said that the numbers may have been boosted by companies rushing to ship goods before new US tariffs kicked in near the end of the month.
Plans for bilateral trade talks to resolve the dispute have stalled, triggering a domestic equities rout and putting pressure on China’s already softening economy and weakening the currency. China’s central bank announced the fourth reserve requirement ratio (RRR) cut this year, stepping up moves to lower financing costs. More support steps look likely, analysts say, as China starts to bear the full brunt of the trade dispute with the United States.
Assessment
Our assessment is that China will need to boost household consumption and improve delivery of higher-value service in order to expand demand. Consumptions amount to 35% of GDP and disposable and per capita disposable income to 30% of per capita GDP. Expanding social security programs and wider savings and investments options could go a long way towards reducing precautionary savings and boosting consumption. We also feel that policymakers would have to shift their priorities to reducing risks to growth by easing monetary and fiscal policy by making the yuan exchange rate ‘more flexible’, allowing greater currency appreciation.
We believe that local governments should be encouraged to issue bonds to find growth-boosting infrastructure projects, countering some of the effects of the long-run risks. We also understand that the economic outlook is not optimistic with exports facing further headwinds as US tariffs kick in and demand from emerging countries ebbs. GDP growth is likely to be on the low of 6.0-6.2% for the coming year. China’s economic growth in 2018 will be more tempered. But this would not necessarily imply that growth prospects are altogether dismal.
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