China: Trade dispute starts to squeeze the economy

For a long time it looked as though the trans-Pacific trade dispute would not really affect the Chinese economy. We now know that economic growth in the final quarter of last year amounted to 6.4%, the lowest level since the low point reached in the financial crisis ten years ago, falling short of the growth target that the Chinese government had set itself. This at least is what the official data from the country’s statistics bureau say. Doubts remain as to whether the decline may of late actually have been greater, but Beijing would probably not have permitted publication of an even weaker growth rate. Precisely in economically weaker phases such as the current one, missing targets and sharper volatility in economic growth in China are delicate issues, as the government likes to use the growth figures to demonstrate stability. For 2018 as a whole, economic growth came to 6.6% as compared to 6.8% in 2017 – the weakest result in 28 years.

Since the late summer, foreign orders placed with Chinese industry have been dropping noticeably. In December, the two purchasing manager indices for industry fell below the growth threshold of 50 points for the first time in two years. China’s exports to the USA have slumped. Above all, the car industry is suffering considerably from the impact of the customs dispute, as it has to bear the strain of both US tariffs and the Chinese counter-tariffs. The conflict is evidently thus starting to dent China’s economy to an ever greater degree.

The current situation would actually suggest that the growth forecast for China be lowered quite significantly. However, as long as Beijing sticks to the current growth target of 6.5%, we do not assume that at least the officially reported growth rates will fall below the target figure in the long term. The Chinese government is resorting to tax relief and easing monetary policy further in order to support the economy. In addition, it is clearly boosting state investment activities again. As of the early summer these measures look set to start stimulating the economy. Should this not suffice, we cannot exclude the official growth rates being “cosmetically improved” to ensure the target figure is met.

It is of course essentially possible that the National People’s Congress in early March resolves to lower the growth target to 6%. Then growth rates would become conceivable that are weaker than those we currently predict. We believe such a step is unlikely, however, as it would mean Beijing conceding a clear weakness vis-à-vis Washington. In our opinion the trade dispute will continue to “bubble along beneath the surface” for quite a while to come, albeit without further escalation being probable. Against this backdrop, we are, for the time being, upholding our growth forecast of 6.5% for 2019. Not until next year do we expect the growth targets to be lowered which would allow for slightly weaker economic growth of 6.2%.


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