Slower, but bigger

More infrastructure required?

The last time that China’s GDP was growing at 6% was the third quarter of 1992. Because growth in the third quarter of this year was the same, journalists were soon reporting the story under headlines about the worst results for nearly 30 years.

Of course, that overlooks the point that when the economy grew 6% in 1992 it produced $101.6 billion of GDP (at current exchange rates). In the most recent quarter the figure was $3.48 trillion (meaning the economy is roughly 35 times larger than back then). But with that caveat, it is certainly true that the ‘rate’ of GDP growth has been trending downwards. The third quarter’s was a drop from 6.4% in the first quarter and 6.2% in the second, plus a fraction below consensus, despite expectations that the trade war with the United States was going to weigh on factory activity, exports and domestic demand.

There were, however, a few signs in the monthly data that the situation was stabilising in key areas. Industrial production picked up a little and the retail sales figures strengthened slightly, helped by a slower contraction in car purchases.

Property construction was another brighter spot, looking a lot more robust than other sectors.

Investment in manufacturing also lifted a little in September on July and August, but it wasn’t enough to reverse a decline across the quarter at large.

Prices at the factory gate contracted in each of the three months and they seem likely to fall again in the wake of the launch of higher tariffs on another $111 billion of Chinese goods in mid-September.

The IMF is now forecasting 6.1% growth for the full year. That would keep the economy growing at just above the lower end of the range Beijing’s targeting and it would also mean that China is growing at about twice the pace of the global economy in general. However, the IMF is also forecasting another dip next year to 5.8%.

Attention is turning to what the Chinese might do to keep the plates spinning in the shorter term. One tactic is more spending on infrastructure, where investment has picked up after a drop-off in 2018. Policymakers will be reluctant to turn on the taps at full strength, though, because the downside is a build-up in debt.

The fact that the economy is “cooling rather than collapsing” further reduces the likelihood of a “big bang stimulus”, Fred Neumann, co-head of Asian Economics Research at HSBC, added in a commentary piece this week.

Another option is monetary policy, including cuts to lending rates and another round of reductions in reserve ratios at the banks. The challenge here is that previous efforts to spur bank lending have brought rather mediocre results. The authorities will also want to keep an eye on consumer price inflation, which is running at its fastest pace in six years (at 3%, which is thought to be the upper end of the government’s comfort zone).

Another likely lever is a round of new corporate tax breaks in the hope that firms are then encouraged to start investing again. However, trillions of yuan in tax cuts to date haven’t delivered the desired boost, probably because of the trade row with Washington, with businesses waiting for resolution of the dispute.

And although there were hopes earlier this month that a deal was close, it looks like being a short-term fix at best, leaving many of the main disagreements unresolved. That means that business bosses are likely to stay cautious, knowing that tensions could flare up again, especially as the US heads into presidential elections next year.

Bigger picture, GDP figures are tapering down from their previously elevated levels and Chinese officials seem to acknowledge that the economy needs to grow at a more sustainable rate.

How the rest of the world adapts to this is going to be crucial, HSBC’s Neumann also highlighted this week, describing the “downshift” in China’s economy as the story that counts above all others. Nothing else in the news – the trade row, Brexit or tensions in the Middle East – is going to have the same impact over the coming year, he said, with a slowing China likely to pose stiff headwinds across the region and beyond.

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