Sign up for Next China, a weekly email on where the nation stands now and where it’s going next.
The Chinese economy already has the weakest growth in almost three decades, and it’s set to slow further despite upside surprises in a range of activity indicators released Monday.
That’s the conclusion from a close reading of the numbers announced in Beijing, which confirmed that domestic output in the second quarter slowed to a record-low pace of 6.2% from a year earlier. While June
retail sales and
industrial output beat expectations, as did
first-half investment, there’s little evidence that the economy has bottomed out.
China’s slowdown will continue to provide the backdrop to re-booted trade negotiations with the U.S. in the months ahead, with economists forecasting a full-year expansion of 6.2% this year and 6.0% next. A more aggressive stance on stimulus could change that, but that’s something Beijing has been leery of for fear of a financial blow-up.
“We expect the Chinese authorities to focus on stabilizing domestic growth through policy easing while keeping a close eye on macro leverage,” Oxford Economics senior economist, Tommy Wu wrote in a report. “This will also help offset pressures on exports given tepid global trade and that the existing tariffs between the U.S. and China are unlikely to be lifted anytime soon.”
The government has focused on issuing a special-type of off-balance sheet debt to allow local governments to spend on infrastructure without blowing out their budgets. Authorities have issued some 1.19 trillion yuan ($173 billion) of these special bonds in the first half of the year, much higher than the 361 billion yuan in the same period last year.
However, economists from
UBS AG and
JPMorgan Chase Bank argue that about 70% of that debt has been earmarked for land reserves or shanty-town renovation, rather than infrastructure projects — meaning less multiplying effects along the industrial chain than would otherwise be the case.
Zhu Haibin, chief China economist at JP Morgan in Hong Kong estimates that infrastructure investment could accelerate to a year-on-year pace of about 8%, though the outlook is being threatened by the risk of deflation in factory prices.
Retail sales growth unexpectedly rose to 9.8% in June, aided by a 17.2% jump in car sales. However, that surge was largely driven by discounts on older car models held by dealers in anticipation of tougher vehicle emission standards. The new policy took effect on July 1 in some regions. A further one-off effect was a round of online retail discounts on June 18 — dubbed “618.” Both factors suggest the pace is unlikely to be sustained.
China’s exports remained stable for most of the first half, despite the ongoing trade tensions with the U.S. Imports were subdued and slowed significantly in the second quarter, leading to a widening surplus. In the meantime, the services trade deficit is shrinking. Therefore, net exports contributed more than 20% to the expansion in the first half, outperforming the contribution of investment.
Whether a boost from net exports can be expected through the rest of the year is doubtful. Although Chinese negotiators are talking with their U.S. counterparts again, there is no certainty that a deal will be reached to prevent another round of tariff hikes. Exports growth already
lost momentum in June.
Employment is the top item on policy makers’ agenda. On Monday, National Bureau of Statistics spokesman Mao Shengyong admitted there was “structural pressure” behind the moderate changes to the official jobless rate. With more than 8 million new graduates entering the job market this summer and the manufacturing sector under pressure, rising unemployment may be inevitable.
Credit & Stimulus
So far, official efforts to underpin the economy have focused on trying to funnel credit to the private sector and small companies, which provide the majority of jobs and output. While there have been signs of success, the government still worries that easy monetary policy isn’t being transmitted correctly. That’s likely to inform what officials do next with regard to stimulus.
A fiscal stimulus plan including about two trillion yuan of tax cuts is slowly feeding through into the economy, though is more likely to stabilize rather than fire up consumption.
In the meantime, the strong credit growth in June will likely moderate as sales of the local government special bonds approach the annual limit. In addition, tightened financing rules in the property sector could lead to a bigger contraction in off-balance-sheet borrowing such as trust loans.
“We continue to see downward pressures to growth in the second half, as prevailing uncertainty around trade policy post G-20 will still weigh on private capex and employment via the confidence channel,” economists including Jenny Zheng and Robin Xing at
Morgan Stanley wrote. Expected stimulus measures “could only partly offset growth drags in view of the reactive nature of policy response and the pervasive impact of persistent trade tensions.”
— With assistance by Miao Han, Yinan Zhao, and Kari Soo Lindberg