A New Growth Model for China

China posted slower economic growth in 2018 under pressure from weaker domestic demand combined with external shocks from the Sino-US trade standoff. Flagging domestic demand reflected efforts to upgrade the economy and address  excessive leverage. Although deleveraging efforts were essential to ensure sufficient control over macro-economic risks，China's policy measures in the deleveraging process contributed to fiscal and monetary tightening，and restricted the expansion of domestic demand. On one hand，infrastructure investment declined due to a shortage of funds，resulting from strict supervision of local government spending and a rigorous cleanup of local government debt. On the other hand，China took steps to clean up shadow banking activities and reduce off-balance sheet financing. This led to a liquidity contraction and strains in funding. In turn there was a deceleration of investment by domestic enterprises and a weakening of household consumption.

Externally，the biggest factor affecting China's economy in 2018 was Sino-US trade friction. Although exports were aided by a weaker renminbi and efforts by enterprises to speed up shipments to the US，the trade friction pinched external demand，and the impact has been apparent since late 2018.

It is unlikely that Sino-US friction will be fully resolved in the near term，so China needs to guide its economy toward a new platform for growth in 2019. It will focus its macro-policy efforts on boosting domestic demand and encouraging new drivers of economic growth. Fiscal and monetary policies will need to be coordinated to achieve those goals.

Traditional Economic Drivers Lose Momentum

China is now at the stage where its traditional drivers of growth are giving way to new ones. For example，infrastructure and property investment，once the key sources of economic growth，are playing a less significant role in the economy. The shift requires new business models and new industries，as China's economy downshifts from high-speed growth to a more moderate pace of expansion.

Investment

Investment in real estate and manufacturing will weaken in 2019，though infrastructure investment will still play a relatively important role in stabilizing growth. Property investment，although it showed good growth throughout 2018，will lose momentum in 2019 due to continued regulations on sales and changed market conditions.

Plans to overhaul slum areas have been scaled back，and that will have an impact on the market. Since 2017，the rebuilding of slum areas was a policy priority that played a key role in increasing property sales in second- and third-tier cities. But more recently，less ambitious reconstruction has led to slower home sales. Considering the effect of sales on investment，it is reasonable to expect weaker property investment in the second- and third-tier cities in 2019.

The reduction of property inventories is likely to run its course before long. Last year there was a sharp rise in real estate investment as a result of supply-side reforms and reduced housing inventories. However，the effects of these favorable market factors are fading. Coupled with restrictions on new home purchases this will lead to a fresh upturn in unsold properties and significantly less investment enthusiasm.

Funding shortages are also a factor influencing real estate investment. Property developers are encountering difficulties in recovering investments. The recent rise in property trust volume suggests a widening gap in funding. As a result，the formula of "property presales，followed by land acquisition，followed by construction，followed by a new round of presales" is no longer viable.

Lastly，residents are less willing to buy homes. With a slowing economy，disposable income has been reduced and household leverage levels are relatively high. In addition，home prices remain high. Consequently，there is not much room for home purchases on credit in 2019.

Investment in some segments of the manufacturing sector will weaken as China transforms its economy. Slippage in the producer price index suggests that price advantages from destocking are fading and declining profitability will make some enterprises less keen to invest.

Fortunately，China can look forward to a bottoming out of infrastructure investment in 2019，and that could set the stage for an upturn in the future. Infrastructure investment has long been seen as an important counter-cyclical support for the economy. China will put more emphasis on strengthening infrastructure construction in 2019，though obtaining sufficient financing will be a challenge. With downward pressure on the economy，corporate earnings and property investment will fall，resulting in a drop in local government revenues from land sales and taxation. Moreover，efforts to trim local government debt have not achieved significant successes so far，and that will restrict financing channels for local governments. It is reasonable to assume that policy adjustments aimed at overcoming capital constraints will be needed before there can be big increases in infrastructure investment.

Trade Outlook

China's exports will lose ground in 2019，affected by the Sino-US trade friction and a weakening of the global economy. The adverse effects of tariff increases have already been seen. There

was a fall in export growth in November and December 2018. Enterprises，wary of significant uncertainties on the trade front，took steps to speed up export shipments last year and that could cut into future deliveries. The outlook for exports to the US is not optimistic while the global picture is also looking weaker. In its latest World Economic Outlook，the International Monetary Fund lowered its economic growth expectations for the world and m