The Mainland economy grew 6.6% in 2018, its slowest pace since 1990. The growth rate slowed throughout the year. But looking at provincial data, there is some good news. Both Guangdong and Jiangsu, the two largest provinces in terms of economic size, saw their GDP exceed 9 trillion RMB for the first time (Figure 1).
Of particular note for Hong Kong is the fact that Guangdong has been crowned the largest provincial economy for 30 consecutive years. As the central government has recently introduced the Outline Development Plan for the Greater Bay Area, this is a welcome milestone.
Thanks to its vibrant technology sector, Guangdong has, in the past three years, marginally outperformed Jiangsu in terms of GDP growth (Table 1). But concerns are mounting, as the export-oriented manufacturing sectors in Guangdong are particularly vulnerable to the China-U.S. trade war. The suspension of the release of the province’s monthly PMI, which stopped updating in October, has not helped to calm anxieties.
As an export hub, Guangdong accounted for 23.5% of the Mainland’s total trade in 2018. In comparison, Jiangsu accounted for a smaller share of 14.4%. Accordingly, Guangdong is feeling the brunt of the trade war impact. Following a 6.8% expansion in 2018, Guangdong has set its GDP growth target at 6-6.5% for this year.
China will release its GDP growth target for 2019 during the upcoming annual parliamentary session in March. Based on the growth targets of major provinces, and with the trade war still lingering, it is likely that a national target of 6-6.5% will be set, compared to last year’s target of “around 6.5%.”
Make no mistake, even without the trade war, China’s economy is on a slowing trajectory as it shifts from an investment-led model to a consumption and services-led model, deleverages and faces an ageing problem. Therefore, the challenges are both cyclical and structural. The trade war only serves as a catalyst for the slowdown.
Consumers have started to tighten their belts, especially for big-ticket items. Sales of passenger vehicles in the Mainland declined for seven consecutive months from July, and the emergence of sharing instead of buying cars may be partly to blame.
The housing market shows signs of cooling as well. The number of cities among the 70 surveyed by the National Bureau of Statistics that reported a monthly price increase for new homes dropped to 58 in January from a recent peak of 67 in August.
For manufacturers, the stagnant factory prices reflect their downbeat sentiment. In January, the producer price index (PPI) rose only 0.1% from a year earlier, the slowest since September 2016. A weak PPI means manufacturers are unable to raise prices, and the ease of factory-gate inflation will add pressure to corporate earnings in the coming months (Figure 2).
As even the conclusion of a trade deal between Mainland China and the United States is highly unlikely to lead to the removal of tariffs previously imposed, the overall economic sentiment is not expected to give rise to a significant rebound in the first half of the year. The structural disputes between the two countries will also not be settled in the near term.
Thus far, the central government has refrained from massive stimulus measures like those implemented in response to the global financial crisis a decade ago. This is reasonable, as rounds of negotiations with Washington are being held with hopes of a positive result to at least address issues such as trade imbalances. Government restraint is also due to the lessons learnt from the negative side effects – industrial overcapacity and a piling up of debt – that emerged along with the 4-trillion-RMB stimulus programme implemented in 2008-09.
With the experience of the global financial crisis, the government has turned to targeted tools thought to be more efficient at stimulating the economy. For instance, the People’s Bank of China (PBoC) rolled out a new medium-term lending facility in December. This measure, which aims to help the more financially vulnerable small and private firms, is effectively a targeted rate cut.
On the monetary policy front, easing inflation and the dovish turn of the U.S. Federal Reserve on its own monetary policy stance should allow more room for PBoC to manoeuvre as concerns about capital outflows have somewhat eased. However, the high level of corporate debt and the political reasons to avoid an RMB slide during negotiations with the U.S. still place constraints on an aggressively relaxing monetary policy.
Fiscal policy is therefore a more appropriate tool for now to boost growth. In fact, the total fiscal deficit of both central and local governments ballooned to 1,813 billion RMB in December 2018 (Figure 3).
It is in Beijing’s interest to ramp up supportive measures with a broader scope if economic momentum continues to wane. The reason is that the Chinese government has a strong intention to achieve its goal of doubling GDP in 2020 from the 2010 level. To meet this important target, the Mainland will need an annual economic growth rate of around 6.2% this year and next.
Any measure will take time to have an impact on the real economy. For the Chinese economy, the second half of 2019 is likely to be better than the first half, as a result of the government’s supportive measures. But of course, this will come at a price, as the government’s balance sheet will likely be loaded with more unwelcome debt.