Outlook for China’s Economy in 2019
In the face of Sino-US trade friction，slower growth momentum and rising debt levels，what can we expect for China’s economy in 2019? The main factors to watch are the performance of the global economy，the domestic economic cycle and the extent of progress in China’s economic upgrading. The outlook for the global economy in the remainder of 2019 is not optimistic.
The big challenge is the sharp upturn in Sino-US trade friction. While the situation has not spun out of control，it is difficult to predict with any certainty how the two sides can resolve their outstanding differences. Meanwhile，major central banks have turned to looser monetary policies. But if central bankers were asked what follows massive monetary stimulus，the simple answer might be more of the same. The options are somewhat limited.
The Chinese economy had been described as “stable but weak” but more recently it is showing more obvious signs of a downturn. In the process，macroeconomic policy has helped cushion the downturn，but more counter-cyclical intervention may be necessary. Yet there is good news in the area of economic upgrading and transformation. The economy has acquired more resilience thanks to increased industrial concentration，progress in promoting high-quality manufacturing，and a rise in the contribution of services to the gross domestic product (GDP). China also needs to bear in mind that temporary trade setbacks should not be used as an excuse for further delays in economic reform.
A Shifting Global Environment
There have been two major changes in the external environment of China’s economic growth: the instability in the China-US relationship and shifting global monetary policies.
On one hand Sino-US relations face new uncertainties as trade talks between the two countries appear to have stalled. This has been weighing on global economic growth. In June，the International Monetary Fund (IMF) lowered its expectations for global and Chinese economic growth. The Japanese，South Korean and European economies have also come under more pressure.
On the other hand，major central banks have been shifting from tighter monetary policies to looser ones，though the remaining room for monetary easing has narrowed. The US Federal Reserve’s Federal Open Market Committee，at its meeting in March，decided on a target for ending its balance sheet reduction activities. It further signaled a dovish outlook for monetary policy at its June meeting and at the July meeting it finally cut rates by a quarter point. The European Central Bank (ECB) announced as early as at its March meeting that it would launch a new round of targeted longer-term refinancing operations from September 2019. In June，Mario Draghi，president of the ECB at the time，referred to additional stimulus measures that would be necessary in the coming quarters. In Japan，the central bank has continued its quantitative and qualitative monetary easing with yield curve control. The major central banks have effectively put on hold their efforts to “normalize monetary policy.”Other countries such as Malaysia，New Zealand，the Philippines，Australia and Russia，have also cut interest rates and India has trimmed rates three times since the beginning of 2019.
In the face of failed efforts to normalize monetary policy，there is limited space for monetary easing by major central banks. Since 2015，the Fed had raised interest rates nine times to 2.5% before cutting rate at the end of July. The Fed had room for nine cuts in the rate reduction cycle，considerably less than in reduction cycles considerably less than in reduction cycles of the past. As far as the ECB is concerned，the benchmark interest rate is now zero，and the deposit facility interest rate is a negative 0.4%. More decreases in the benchmark rate will only worsen the situation，dealing a further blow to the profitability of Europe’s banks. As the ECB’s treasury bond purchases in Germany，Finland and Slovakia have been more than one-third of each of those country’s bond stock，there is little room for another round of quantitative easing. The Bank of Japan (BOJ) faces a similar situation，holding 40% of Japan’s treasury bonds. Although the BOJ has stated its intention to buy 80 trillion yen of treasury bonds a year，the actual purchase in 2018 was only 26 trillion yen. Further expansion of quantitative and qualitative easing is highly unlikely.
Fiscal policy will need to play a more active role in stemming the downward economic trend. The better economic performance of the US compared to that of other countries since 2018 is largely due to President Trump’s tax reform. For China，the People’s Bank of China has more tools for monetary easing than some of the other major central banks. Yet，constrained by restrictions on macro level leverage ratios and the need for risk prevention，monetary policy plays a less critical role than fiscal policy in China. For example，in the second quarter of 2019，China made a structural adjustment of its monetary policy against the increasing downward pressure. Instead of cutting interest rates or making an overall reduction in the required reserve ratio on bank deposits，at least some of the time，policy makers adopted targeted cuts in bank reserve requirements aimed at rural banks and implemented according to bank size.
China’s GDP rose a year on year 6.4% in the first quarter，a sign of economic stabilization，but this was followed by a 6.2% reading in the second quarter，the lowest growth in 27 years. This was despite the fact that infrastructure projects were started ahead of schedule，enterprises (including importers) stocked goods in advance because of the anticipated reduction in value-added tax in April，and some positive developments in the Sino-US trade talks. During the same period net exports contributed 1.5% to GDP growth，the highest contribution since related data became available in 2009，and in March alone，industrial value-added output soared 8.5% from a year earlier. This limited good news was unsustainable，however.
Counter-cyclical policies were withdrawn in the second quarter of 2019，following signs of first quarter recovery. The program of “six stabilities”(stability in employment，finance，foreign trade，foreign investment，investment overall and public expectations) was not mentioned at the Chinese Communist Party’s Politburo meeting on April 19. The regular first-quarter meeting of the central bank repeated a call for greater control over liquidity. This was followed by a less proactive fiscal policy and slower money and credit expansion. Consequently，industrial output growth was at a record low in May. Infrastructure investment also showed slower growth. Manufacturing investment weakened，and there were signs of cooling investment in real estate. China’s economy was again facing greater downward pressure.
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