Not quite a week ago, China’s central bank Governor said Beijing was preparing “for the worst” in a trade war with the United States that, he said, could go on for a long time.
On Friday, China laid the ground for how to fight back, releasing unexpectedly bad economic numbers – at 6.5-per-cent growth, the worst Chinese quarter in nearly a decade – hours after a rare co-ordinated pep talk from a trio of the country’s most senior financial figures. The National Bureau of Statistics blamed the poor numbers on the “daunting task” of domestic reform as well as the “extremely complex environment” abroad.
China’s economy had already been showing signs of weakness, but its exporters have experienced a boost as they move goods ahead of an expected rise in U.S. tariffs to 25 per cent next January.
In painting a gloomy picture now, however, Chinese policy-makers are both acknowledging the toll likely to be exacted by trade turmoil with the United States and giving themselves justification to act more quickly – even if current economic fragility has little to do with Washington’s policies.
Beijing’s leadership wants to pin blame “not on what was happening – which was already a quite strong deceleration of the Chinese economy – but more on the external environment,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis SA. “It’s easier to justify the stimulus” and, she said, “make sure the growth does not collapse in 2019.”
At a 6.5-per-cent third-quarter growth rate, China’s economy remains within the target set by national planners. But it marks a slowdown from 6.8 per cent and 6.7 per cent in previous quarters, and dips the Chinese growth rate to a level not seen since early 2009, in the midst of the financial crisis.
The automotive sector has been among the worst-hit, with car sales down 4.1 per cent in the third quarter. Automotive is “often seen as an indicator for consumer sentiment,” and while the situation in China is complex, international pressures appear to be playing a role, Julia Wang, HSBC economist for greater China, wrote in a research note on Friday. The “tariff war has added to the uncertainty, as it has led to expectations of sharp changes in prices. All of these have weighed on sales and investment in this part of the economy.”
China’s markets have reflected the depth of concern, with the Shanghai Composite Index down roughly 30 per cent from its peak in January. Some US$3-trillion in Chinese equity value has evaporated over the past six months, enough that, in August, the Chinese market size dropped below that of Japan. The remarkable repositioning relates to fundamental problems in what observers have called a “credit-addicted” Chinese economy and government efforts to address those problems, in addition to the worsening trade dispute with the United States. On Friday, Fitch Solutions Macro Research said it expects “China’s export growth to decelerate sharply over the coming quarters.”
In the face of a dimming outlook, China’s most senior economic officials delivered a rare and co-ordinated response on Friday, in an effort to buoy sentiment observers saw as evidence of genuine concern.
Yi Gang, the People’s Bank of China Governor, said the bank is studying how it can smooth financing for companies. Guo Shuqing, who chairs the China Banking and Insurance Regulatory Commission, emphasized the “stable financial system” underlying what he called “abnormal” market fluctuations. Liu Shiyu, head of the China Securities Regulatory Commission, promised other measures intended to help, including issuance of bonds by private companies and participation in corporate restructuring by private-equity funds.
That’s in addition to an announcement earlier this week that Chinese officials are seeking private investment for US$362-billion in infrastructure projects.
Such announcements, however, “are just there to avoid the impression that it’s a 2008 remake,” said Ms. Garcia-Herrero, in reference to the avalanche of public spending unleashed by Chinese officials to immunize their own markets and companies from Western financial contagion.
The buildup in Chinese credit has been so enormous since then that Beijing is unlikely to be able to replicate the effectiveness of its intervention a decade ago. To do so today would be simply too costly.
Ms. Garcia-Herrero nonetheless expects officials “to put more oil in the engine” to accelerate growth, including by quickly cutting value-added tax rates and approving new lending.
Other measures have also been discussed, including a substantial paring back of emission reductions targets in northern China, in part to ensure heat supply for residents left cold last winter as officials took strong measures against coal use. But a “less aggressive anti-pollution campaign” should also help stabilize growth in the fourth quarter, said Wendy Chen, a Shanghai-based economist with Nomura Securities. Another option for policy-makers: greater bond issuances by government and policy banks.
Still, such measures are unlikely to completely counter the pressures gathering against the Chinese economy. “In 2019, we see that growth could slow further,” Ms. Chen said.
China’s corporate sector is bracing for that likelihood. The trade war will be “arduous and long-term,” Zhang Weijing, chair of the China Chamber of Commerce for the Import and Export of Machinery and Electronic Products, warned on Friday in a report urging firms to diversify their markets.
At companies such as Changzhou Zhaishi Furniture, such plans are already under way. “We plan to go abroad and invest in Southeast Asian countries. We also plan to form co-operative relations with countries, to reduce our reliance on the U.S.,” foreign trade manager Huang Cheng said.
But, he acknowledged, customers have cancelled orders of the company’s home and office furnishings as a result of rising tariffs.
“The whole industry is now in a cold winter,” he said.
With reporting by Alexandra Li