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Economic slowdown in China


In response to the economic growth slowdown, the Chinese authorities are adjusting their policy mix.

Christine PELTIER

TRANSCRIPT // Economic slowdown in China : February 2019

In China, economic growth slowed to 6.6% in 2018.

This growth figure was published last week. The authorities also revised down the growth rate to 6.8% for 2017. But most activity indicators have highlighted that the slowdown has already been underway since mid-2017.

Domestic demand growth has weakened, mostly because of the restructuring process in the industry and due to economic policy tightening. As a matter of fact, from late 2016 to the spring 2018, the authorities tightened monetary policy, property policy and, most importantly, strengthened financial-sector regulation.

All this has led to a decline in financial-instability risks. But it has also led to slower domestic credit growth and weaker investment.

Private consumption growth also slowed last year. Chinese households experienced a new period of income growth moderation. This has obviously been a consequence of the difficulties of the manufacturing industry.

These difficulties have worsened recently. Exports have started to feel the impact of US protectionist measures. Exports lost steam in November and contracted in December.

In response to the economic slowdown and rising difficulties of the corporate sector, the authorities have adjusted their policy mix.

Monetary policy has been eased timidly in recent months. It is aimed at reactivating lending to the private sector, especially to SMEs. Local governments have been authorized to issue more bonds and, in fact, investment growth in public infrastructure rebounded in Q4 2018.

However, the decline in interest rates and the recovery in bank loan growth have been very moderate so far. As a matter of fact, the central bank’s room for maneuver is very narrow due to the debt excess of the economy. Monetary policy is also constrained by the risk of capital outflows. This is a problem because China’s external constraint is already narrowing due to falling current account surpluses, and currency depreciation would further feed trade tensions with the US.

Therefore, the authorities will have to make more use of fiscal stimulus measures. Household and corporate income tax cuts have come into effect since January 1st. Other tax measures should be announced soon.

What is China’s outlook in the short term ?

The economic slowdown will continue at least in the first months of 2019.

Export growth prospects are uncertain as they depend on the trade deals Beijing and Washington might agree on. Any recovery in investment growth should be moderate. Meanwhile, private consumption is expected to rebound thanks to tax incentives.

In 2019 as a whole, real GDP growth is projected at 6.2%. This is a low point for China, which is a sign of deep structural change in its economy.


Go further:

China. Fiscal stimulus: the best option

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