China’s slowdown now likely to be more pronounced as external trade shock amplifies tighter availability of credit

Titled Global Macro Outlook 2019-20 said that “Growth in China’s industrial sector has been slowing since the beginning of the year because of deliberate deleveraging measures put in place to correct internal imbalances and contain financial risk associated with credit fueled growth. Real GDP growth slowed to 6.5% in the third quarter from around 6.8% in the first half, and industrial production slowed to 5.8% year-on-year in September lower than the average growth rate of 6.7% recorded in the 2018H1. We believe that escalating trade frictions with the US, China’s main export destination, will put further downward pressure on China’s growth in the coming years. We expect Chinese authorities to head off the weakening of the economy amid escalating trade tensions with stimulative monetary and fiscal measures, but the policy offset will only be partial. We have therefore revised our growth forecast to 6% in 2019, down from 6.4%, following an estimated 6.6% growth in 2018. In 2020, we expect real GDP growth to again be 6%.”

Monetary policy is easing with the October cut in the reserve requirement ratio to 14.50% for large depository institutions, a cumulative decline of 250 bps since March. Interbank interest rates have trended lower since the start of this year. Lending rates have also steadily fallen since the beginning of the year. A range of fiscal measures, including tax cuts and direct support to exporters in the form of subsidies and export rebates, will also lower the tax burden and support growth. In addition, the government will likely continue to push for greater investment in high tech and other sectors identified as key to China’s economic transformation.”

It said “As the Chinese authorities try to stimulate the economy on the one hand and proceed with deleveraging on the other, the risk of a sharper slowdown due to policy missteps has risen. The policy objective of reducing financial sector risk and preserving a steady growth momentum are inherently at odds with each other in the context of the externally generated trade shock. A sharp deceleration would have negative spillovers on the global economy through trade channels, commodity prices and sentiment. A large depreciation of the Renminbi would be similarly disruptive, particularly for emerging market countries. Lastly, internal imbalances typically magnify in a slowing growth environment as servicing legacy debt becomes more onerous.”

It added “There is also a risk that while maintaining growth and employment, including through more proactive monetary and fiscal policy, existing imbalances are unaddressed and further imbalances like overproduction in certain export sectors or new technology sectors will build up. Further significant misallocation of resources would have longer-term consequences for growth.”
Source : STRATEGIC RESEARCH INSTITUTE, STEELGURU
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