China: Downturn pauses, but US deal is not a stimulus package

 

The economic downturn in China lost much of its sharpness at the end of 2019. Economic growth did not lose further momentum in the fourth quarter. At an unchanged 6.0% (y/y), the current growth rate is not only in line with market expectations but also just within the growth range set by Beijing – this is still a political issue in China.

Certainly, the de-escalation in the trade dispute with the US and the hope for at least a partial settlement have played their part in easing the downward pressure on the Chinese economy. Even if US President Trump initially only took further tariff increases off the agenda, this has given China’s export industry a breathing space in recent months. However, the economic stabilisation does not appear to have been entirely without government stimulus. This suggests the marked acceleration in industrial growth at the end of the year, which bears the hallmarks of earlier short-term stimuli from Beijing, as we have seen several times in the past year.

With the signing of the „Phase 1“ agreement and an initial withdrawal of already imposed punitive tariffs, the weighted US tariff on imports from China is now around eight percentage points lower than it would have been without the cuts. Although this brightens the growth prospects for the Chinese economy somewhat, the trade agreement is unlikely to prove to be a stimulus package. The bulk of US tariffs will remain in place and the average tariff will remain high at over 13%. China’s export economy will not get back on its feet that quickly. In addition, the imports that China plans to purchase from the US in the next two years will slow down growth, even if the promised volumes, which would be equivalent to a doubling of Chinese imports from the US, are nowhere near being met.

China’s growth will continue to weaken, not least for structural reasons. However, the slowdown will not be as severe as we thought a few months ago. Nevertheless, the five before the decimal point in the official growth rate is as good as set for this year. We expect the figure to be 5.9% in 2020 and 5.8% in 2021.

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