The Outlook for China's Economy – Roundtable Discussion

As 2018 draws to a close，it is time to take stock of the developments on the economic front. It has been a year of significant ups and downs. The depiction of the economy has shifted from "stable and improving" to "change amid stability". Events have been overshadowed by the Sino-US trade dispute and an unsatisfactory performance by the nation's financial markets. Looking ahead to what 2019 holds for the economy in China and the rest of the world，the forecast is somewhat pessimistic. The International Monetary Fund has lowered its expectations for global economic growth for the first time in three years. At the same time，few domestic and foreign research institutions have offered up higher forecasts for China's economic growth or its price levels. However，as the saying goes，fortune and misfortune are two buckets in the same well. It is anticipated that there will be more good news on China's economy in the new year. 

Moderator: Zhong Wei，associate editor at China Forex

Panelists: Shen Jianguang，vice president and chief economist of Jingdong Finance

Zhang Ming，chief economist at Ping An Securities，research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences

Zhong Wei: First，I would like to thank our panelists for agreeing to take part in our roundtable discussion. We are here today to discuss the prospects for the Chinese economy in 2019，particularly the Sino-US trade relationship，China's domestic fiscal and monetary policies，the domestic capital and real estate markets，and further measures in the reform and opening up of the economy.

The Sino-US relationship in 2018 has seen great challenges，and the trade dispute between the two sides has been particularly unpleasant. If the US is determined to escalate the dispute，it will cast a heavy shadow on the outlook for the economic growth of both countries. In terms of the US domestic situation，the White House is under pressure. US economic growth is likely to slow down，with a rising trade deficit. The stock market has been volatile and the housing market has cooled. Policy differences within the administration have bubbled over into public view. There have been open disagreements over trade policy involving Secretary of Commerce Wilbur Ross，Trade Representative Robert Lighthizer，Director of the National Economic Council Larry Kudlow and Director of the National Trade Council Robert Navarro. Against this background，how do you see the Sino-US trade dispute evolving? Will there be a turning point in 2019? That is，even if the dispute cannot be resolved in the near term，both sides will strive to put it under a basic framework so that it will not get worse. If so，that would be good news for both China and the US，as well as for the global economy. (Editor's note: after this discussion took place the leaders of the two countries called a truce in their dispute though there has been no fundamental resolution of the underlying issues.) 

Zhang Ming: The outlook for a resolution of the Sino-US dispute is not reassuring despite signs of easing tensions. There are three reasons for this assessment. Firstly，behind the dispute is a shift in the overall strategy of US elites towards China ¨C from "engagement" to "containment" or even "confinement". The trend will not be reversed even if President Trump changes his attitude or is no longer in the White House. Secondly，an economic slowdown or a stock market crash in the US will more likely lead to a hardening of the US stance towards China rather than an easing. Thirdly，the dispute will persist over the long term. And in the near term it will be full of twists and turns. China needs to be prepared for this.

Shen Jianguang: Considering the current US economic situation and the related policy direction in the US and China，there is a good chance that the two countries will reach an agreement by the end of this year. They may make efforts to avoid or delay raising the punitive tariffs on $200 billion worth of Chinese goods from 10% to 25%. (Editor's note: This is largely in line with the temporary agreement reached at the G20 meeting in Argentina shortly before publication of this edition of China Forex)

In fact，both sides are suffering adverse effects from the trade dispute. In the US，the economic trend，financial market fluctuations，political developments and the response of the business community signify tremendous pressure on the administration to settle the dispute. For instance，there were declines in the stock and bond markets in October. And the costs to the corporate sector have increased. Ford Motor Company complained in September that the steel tariff had resulted in a US$1 billion reduction in its profits.

For China，the impact is also far-reaching. Because it is not easy to find a replacement for the US as an export market，the trade dispute poses risks to China's investment prospects and entrepreneurial confidence. It also threatens the industrial chain and numerous downstream industries. The longer the dispute lasts，the greater the risk will be. For example，some large Japanese manufacturers are reported to have re-examined their operations in China and looked at plans to transfer their production lines out of China，in order to avoid higher US import duties.

Zhong Wei: In respect of China's macro-controls in 2018，fiscal and monetary policies have attracted considerable attention. Under the principle of so-called "credit constraints，monetary easing" and amid financial deleveraging，the growth of total social financing and broad money supply continued to decline，reaching a new low in October 2018. The nominal exchange rate of the renminbi against the US dollar also stopped rising and even began to fall. That noted，monetary policy will turn from deleveraging to leverage stabilization in 2019. Would you agree with this assessment? And in your view what is the likelihood of reductions in the bank reserve requirement ratio (RRR) or interest rates?

Fiscal and taxation policies in the new year are also a hot topic，ranging from social security payments to real estate taxes to adjustments in individual tax rates. In your opinion，is there room for tax cuts and further increases in the budget deficit?

Shen Jianguang: There have been indications that leveraging in China is stabilizing and the policy emphasis has shifted to economic stabilization. For instance，deleveraging was not mentioned at China's Politburo meeting on October 31 and  Governor of the People's Bank of China (PBOC) Yi Gang felt it was necessary to explain this policy. China's policymakers have again adjusted their judgment on the economic situation and financial risk prevention.

Monetary policy was marginally adjusted in the third quarter of 2018 and has remained loose overall since then. In addition to the two targeted reserve requirement ratio cuts，put in place in July and October，the PBOC made use of the Medium-term Lending Facility (MLF) as well as relending，rediscounting and other policy tools to regulate liquidity in the financial markets and targeted areas of the economy. Monetary easing is expected to persist in the future because ensuring stable growth is becoming increasingly urgent. China has faced both external pressure from the trade dispute and internal pressure from an obvious economic slowdown as a result of deleveraging and fiscal tightening this year. There is a high probability of RRR and interest rate cuts in 2019. There will be no flooding of the market with credit，but there will be adequate liquidity.

As far as fiscal policy is concerned，much has been said about the budget deficit. Presently，China has a pressing need for reductions in taxes and administrative fees. The growth of China's fiscal revenues，especially tax revenues，has been slowing steadily since the beginning of this year. In October it was negative. There are likely to be significant tax cuts in 2019. The reform of individual taxes，