- How much of China’s economic slowdown is the fault of the US trade war is a topic of discussion, with many analysts pointing to structural issues in Chinese economy
- Economists also argue over the level of government intervention required to stimulate an economy that is growing at its slowest rate in decades
After China's economic slowdown grew more pronounced in August, analysts continued to debate how much of the blame rests with the trade war and how much is down to older, underlying issues in the Chinese economy.
Industrial production growth - an important gauge of manufacturing output - slowed to 4.4 per cent in August, a new 17-year low, while retail sales growth slowed to 7.5 per cent. Fixed asset investment slowed to 5.5 per cent in the first eight months of year, down from 5.7 per cent in the first seven months, despite government efforts to boost local government infrastructure investment.
While the trade war has been commonly blamed for a slowdown which also saw China's economy grow at its lowest rate on record in the second quarter of this year, others have pointed to challenges to growth that predate last July, when the first tariffs were enacted, such as the deleveraging campaign that started two years ago to reduce debt and risky lending.
Zhou Hao, senior economist at Commerzbank, suggested that while each of Monday's figures from the National Bureau of Statistics were worse than expected, they may not come as a surprise to policymakers in Beijing, who have already baked the slowdown into the country's economic strategy.
"The economic figures would not be that good even without the trade war. The slowdown was already projected," Hao said. "Instead, policymakers are using the occasion to accelerate long-awaited but delayed reforms, such as interest rate liberalisation."
Others suggested that the material effects of tariffs on China's economy are real and that further pain awaits, especially after the tit-for-tat escalation in tariffs that took place over the past month.
Research from Oxford Economics suggested that new US tariffs on China starting on September 1 " including the knock-on effect on sentiment " would reduce Chinese growth by about 0.2 percentage point in 2019 and another 0.3 percentage point next year. It cut its 2020 growth estimate to 5.7 per cent, well below the 6.0 per cent minimum growth rate set by the government for this year.
Louis Kuijs, head of Asia economics at the firm, said the near-term economic outlook remains challenging amid a harsher external environment and soft domestic demand. "The key downside risk is the authorities not stepping up policy support sufficiently," he warned in a note on Monday.
Indeed, how much stimulus Beijing should unleash in response to the slowdown is another point of debate, with calls for more aggressive policy easing, including larger government spending and more aggressive rate cuts growing louder in recent weeks, after Beijing pledged to increase support for the economy.
Should the downturn deepen, Nomura analysts are expecting that Beijing will be forced to act more decisively.
"In our downside scenario, Beijing would ramp up policy stimulus substantially. It could speed up credit growth, significantly cut rates, ease tightening measures in property markets, greatly raise the fiscal deficit, ramp up spending on infrastructure, cut the purchase tax on automobiles and provide cheap credit and subsidies for business to buy capital goods," analysts from the Japanese bank wrote in a recent note.
Indeed, the debate appeared to be addressed by Premier Li Keqiang in an interview before Monday's data release, which seemed to pour cold water on calls for more voluminous intervention.
"It is not easy to keep growth above 6 per cent amid the complex international situation and high base," Li said, in an interview with Russian news agency TASS published on Sunday. "Despite the downward pressure caused by the slowing global economy, protectionism and unilateralism, the Chinese economy has a large degree of resilience, potential and manoeuvring room."
Unlike the previous massive injection (after the financial crisis), Beijing prefers loosening in small stepsZhou Hao, Commerzbank
Many analysts are therefore expecting the government to respond to the ongoing slowdown with more of the sorts of incremental policy moves seen to date.
For instance, the State Council, China's cabinet chaired by Li, has already shifted some of the 2020 local government bond issuance quota to this year to boost financing for infrastructure projects, while the People's Bank of China cut the amount of money that banks are required to hold in reserve at the central bank to expand banks' lending capacity.
"Unlike the previous massive (money) injection, Beijing prefers loosening in small steps and is highlighting support for the real economy, manufacturers in particular," said Hao at Commerzbank, referring to the huge levels of stimulus pumped into China's economy after the global financial crisis of 2008.
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.
