China is entering a new era where the number ‘five’ will feature very prominently. When it comes to communications all the talk is of a world of 5G and for economic growth the figure 5% is increasingly spoken of.
Economists have anticipated the day when China’s annual GDP growth dips below 6% for many years. But an increasing number are now baking it into their forecasts for 2019 and 2020 too, after growth slipped to 6.2% during the second quarter and seems to have slowed further in recent months.
GDP growth with a ‘five’ handle on it is a particularly sensitive issue for the Chinese government. It has long cited 6% as the magic minimum to ensure long-term development and hit its targets for a “moderately prosperous society” at the end of the current 13th five-year plan in 2020.
As such, there are not only questions about whether the central government will want to reveal sub-6% growth over the coming months, but also whether it has happened already. Earlier this year, for example, the Brookings Institute calculated that China had been overstating its GDP figures by an average of 1.7 percentage points per annum between 2008 and 2016 (on this basis, GDP growth is already below 5%).
The Wall Street Journal recently published other alternative data sources pointing to a severe slowdown over the summer, especially in manufacturing. The main culprit is the Sino-US trade war. During August, exports fell 1% year-on-year overall, but were down 16% to the US. The most liked comment to the Wall Street Journal article suggested that Trump had astutely seized the moment at which China’s long-term growth rate decelerated to rebalance the relationship between the two countries. “His play, if successful, will go down as one of the most brilliant economic strategies since Reagan’s to bring down the USSR,” it concluded.
Certainly as WiC has written before, exports provide countries with “free” GDP growth funded by others’ demand. For the past few years, this kicker enabled the Chinese government to maintain the difficult balance act of deleveraging the banking sector while maintaining high-enough GDP growth overall.
But keeping the plates spinning is increasingly tricky because the country’s total debt to GDP reached 303% in July. As The Economist recently highlighted, tighter financing conditions are also exposing problems at smaller banks, which increased their assets by 144% over the past five years compared to 53% by the large banks. Since May, the government has had to organise bailouts for three smaller lenders: Baoshang Bank, Bank of Jinzhou and Hengfeng Bank. One indication of the anxiety these moves provoked: after ICBC stepped in to prop up Bank of Jinzhou in July the banking giant subsequently saw its share price retreat by 10%.
The Economist reports that analysts worry that the three rescued banks may not be the last to need help and that the rot at the smaller city-based lenders is broader. By the central bank’s own count, 420 of China’s 4,327 lending institutions are at a ‘high risk of distress’.
So the government has tried to tweak its policy tools so it can target pump-priming more carefully – i.e. to chivvy along growth while minimising bad loan risks. In mid-August, it replaced its benchmark loan rates with new Loan Prime Rates (LPR) tied to the medium-term lending facility (corporate lending will be tied to a one-year LPR and mortgages to a five-year one).
Then on September 6, the PBoC cut the banks’ reserve requirement ratio (RRR) by a further 0.5%, its third cut this year. To ease the pressure on smaller regional banks, it cut their ratio by a further 1%. Together the two cuts should inject a further Rmb900 billion ($126.35 billion) into the financial system.
The central government is also encouraging local governments to bring forward their 2020 borrowing quotas, although it has not yet upped them. However, it has stated that funds must be used for more productive purposes (roads and railways, which provide a GDP multiplier) rather than real estate and shantytown redevelopment, as they were during the first half of the year.
Will it be enough? Many economists believe that China’s stuttering manufacturing sector and fading US GDP growth (previously juiced up by Trump’s tax cuts) are the precursors of a 2020 global recession.
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