China Stimulus May Not Be Enough To Boost Economy
China has a bunch of little, nagging problems that will slow its economy in the months ahead. Whether its cracking down on crazy loans from small, muni lenders, to real estate developers run amok and—how can anyone forget—Trump’s trade war, China’s famous 6.5% GDP growth target will be missed next year.
“It is hard not to be a bit bearish,” says Janet Mui, a global economist with Cazenove Capital in London. “If you look at things like property investment, fixed-asset investment numbers declining and trade tensions, it’s not a good base case. Our base case is for a full-blown trade war,” she says. “If that happens, they lose 1% of their GDP. There are definitely downside risks to investing in China.”
China’s mainland stock market indexes in Shanghai and Shenzhen have been in a bear market since the summer.
China’s growth trajectory has been on a downward trend since 2011, but it was the trade tariffs imposed in the first quarter and then again in June that sent the A-shares into bear territory. All of this is happening at a time when China’s government no longer has the penchant for massive stimulus programs, and the economy is slowing from nearly 10% growth in 2011 to 6.5% growth currently. China has not managed to bust through its coveted 6.5% target, despite tax cuts and other stimulus measures.
China is undergoing a structural downturn. It is moving away from being the world’s low-cost producer to being a consumer-driven economy whose locals are paying more attention to things like health. Which means China cannot pollute like it used to, and that brings in stricter environmental laws that can also hamper growth.
Yet, even without the trade war, BNP Paribas economists said recently that they expect China’s growth to slow down in tandem with a synchronized global downturn anyway in 2019.
China’s share of the global export market has been declining since 2016, with its market share dropping from 13.7% in 2015 to 12.7% in 2017. The turn in the manufacturing investing cycle, meanwhile, looks unsustainable, BNP Paribas economists led by Jacqueline Rong wrote in a note to clients published Nov. 16.
Monetary policy tightening saw new home sales volume growth decelerate to 2.2% annualized in October from 8.2% in 2017. Property investment growth is still solid at 9.7% annualized as of September.
“I think the near-term uncertainty is distracting investors from the longer-term opportunity in China,” says Stephen Kam, co-head of product management for Asia ex-Japan at Schroders, a global investment firm with $44 billion at work in Asian markets.
Investors like Mui, however, seem to be digging for reasons to remain sour on China.
They all point out that Singles’ Day shopping festival sales on November 11—while a record-breaking $30-billion-plus in goods were sold—only grew by 23.7% from last year instead of the previous growth rates of 42.3%.
October’s retail sales growth was 8.6% year over year compared to 9.2% in September. It’s the slowest pace in the past five months and the second-slowest reading since 2004, but it is nearly three times larger than the U.S. retail sales growth rate.
China bears point out that the retail data showed barely any boost from the cut in the personal income tax that took effect last month.
The general slowdown in demand, both external and domestic, could cloud the prospects of the manufacturing sector. Any rebound in infrastructure investment growth is likely to be constrained by funding challenges as Beijing is putting a lid on reckless spending at the municipal level.
If China opened its economy more to allow for foreign direct investment to take a larger share of the economy, then investors are likely to move into the bullish camp. Also, if Trump says that there will be no extra tariffs, that would also stop the bloodletting in the A-shares market.
Trump and Xi Jinping will meet on November 30 at the G20 Summit in Buenos Aires.
Investors will also wait for new reform plans to be unveiled at the 4th Plenum of the 19th Party Congress, which is expected sometime within in the next four weeks.
One thing is for sure: Xi’s government is not keen on throwing money at every problem in the economy. That means the scope for countercyclical measures is slim, following several years of Wall Street-loving China stimulus measures.
Debt-fueled stimulus is hampered by the already high level of debt. Conventional stimulus in the form of subsidies would be challenging in the face of U.S. criticism of Chinese state support to favored sectors.
“Countercyclical policy measures might cushion the speed of growth deceleration but would be unlikely to reverse the downward trend in the economy,” says BNP Paribas’ Rong. “We expect a progressive decline in China’s growth rate.”