Recent data seems to indicate that the Chinese economy is facing increased downward pressure. Industrial production expanded 4.4% year-on-year in August, the slowest pace since February 2002. Growth in retail sales and investment have also edged down, reinforcing the belief that Beijing may soon move more boldly to meet the economic growth target of 6%-6.5% set for this year.
Policymakers are increasingly worried about the current state of the economy. For instance, Premier Li Keqiang said that it would be “very difficult” for the Chinese economy to grow at a rate of 6% or more.
An array of measures, including cuts in the reserve requirement ratio and value-added tax rate, have been introduced to spur economic growth, which eased to 6.2% in the second quarter of 2019, from 6.4% in the previous quarter, amid the escalating trade tensions with the U.S. that have been ongoing since early 2018.
Although the Central Government initially refrained from returning to its old recipe for spurring economic growth, evidence suggests that it might have started to ramp up spending on infrastructure again in recent months. The quota for local governments’ special bond issuance, which exclusively fund infrastructure projects, was set at RMB2.15 trillion for 2019, compared to RMB1.35 trillion last year. In the first eight months of the year, some RMB2 trillion worth of special bonds have already been issued (Figure 1), accounting for 93% of this year’s quota.
Fiscal stimulus and monetary easing could shore up the Chinese economy. However, these have the unwanted side effect of further increasing the country’s debt burden. For instance, the total debt-to-GDP ratio rose to almost 250% at the end of June 2019, from 243.7% at the end of last year.
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