Perspectives

Difficult policy choices

th  
5
EcoPerspectives // 4 quarter 2019  
economic-research.bnpparibas.com  
China  
Difficult policy choices  
Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from  
China. Yet, exchange rate policy as an instrument to support economic activity is expected to be used moderately in the short term.  
There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities priority on  
pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic  
growth and deleveraging, the authorities dilemma could get worse if recent fiscal stimulus measures do not have the intended impact  
on domestic demand, or if the external environment were to deteriorate further.  
Real GDP growth slowed to 6.2% year-on-year (y/y) in Q2 2019,  
1- Growth and inflation  
down from 6.4% in the previous quarter and 6.6% in full-year 2018.  
Growth should continue to slow in the short term since the support  
provided by policy stimulus measures will only partially offset the  
impact of the slump in external demand. The authorities’ room for  
manoeuvre to stimulate growth has narrowed sharply in recent  
years due to the erosion of external surpluses and rising internal  
imbalances (excessive debt, need to clean up the public and  
financial sectors).  
 GDP Growth (%)  
 Inflation (%)  
Forecast  
Forecast  
6
.7 6.8 6.6  
5.9  
5.6  
2.8  
2.4  
2.0  
2.1  
1.6  
Yuan depreciation should continue to be moderate  
In the first eight months of 2019, export revenues stagnated  
compared to the same period in 2018 (-0.05%) because of higher  
US tariffs and the decline in world trade growth. Thanks to a 4.5%  
fall in imports, the trade surplus increased by 30% y/y to  
USD 262 billion over the same period. The export sector’s troubles  
are expected to get worse in the months ahead, and the outlook for  
16  
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- US tariffs and China’s exchange rate policy  
2020 is still very uncertain since it hinges on the outcome of trade  
▪▪▪ Nominal effective rate, CFETS *  USDCNY rate (rhs, inversed scale)  
talks between Washington and Beijing.  
1
1
05  
00  
5.5  
5.8  
6.1  
6.4  
6.7  
7.0  
7.3  
0
7/18: +25% on List 1  
0
6/18: First US threats  
Since Q2 2018, the weighted average tariff imposed by the United  
States on imported Chinese goods has increased from 6.5% to  
about 20% at the end of September 2019 (tariffs have so far been  
raised on more than two thirds of these imports). The weighted  
average tariff could exceed 25% by the end of the year if the  
recently renewed trade talks were to collapse and the new tariffs  
announced by the Trump administration last summer were  
effectively introduced. It threatened to apply tariffs to all US imports  
of Chinese goods (totalling USD 550bn). Between the end of March  
0
8/18: +25% on List 2  
9
5
05/19: Tarif hike of  
90  
2
5% on List 3  
0
7/19: New tariff  
hikes announced  
8
8
7
5
0
5
0
9/18: +10% on List 3  
0
9/19: +10% on List 4A / US & China agree to start again negotiations  
2018 and the end of August 2019, the yuan lost nearly 13% against  
the dollar (including 3% in July-August). This decline more than  
offset the increase in the yuan reported in the previous fifteen  
months. With each new increase in US tariffs (announced or  
effective), the Chinese authorities have responded by letting the  
yuan depreciate to partially offset the impact on exporting  
companies (chart 2). In September, despite the introduction of new  
tariffs, the yuan levelled off against the dollar because Beijing and  
Washington had agreed to restart trade talks.  
0
7/2016  
Source: China Foreign Exchange Trading Center, BNP Paribas.  
The CFETS index shows the yuan’s weighted average exchange rate against the  
07/2017  
07/2018  
07/2019  
*
currencies of China’s main trading partners.  
* The lists of Chinese goods imported by the US and affected by tariff hikes are called  
*
List 1” totalling USD 34 bn, “List 2” totalling USD 16 bn, “List 3” totalling USD 200 bn  
and “List 4A” of USD 125 bn (first slice of list 4).  
balance-of-payment pressures). Moreover, the slight improvement  
in the current account surplus (it stood at 1.3% of GDP in H1 2019  
and is projected 1.7% in full-year 2019, compared to 0.4% in 2018)  
and the expected increase in foreign portfolio investment inflows  
into China’s financial markets (following recent market opening  
measures) might also help stabilise the exchange rate in the short  
term.  
The authorities are expected to resort to the exchange rate policy  
moderately to stimulate economic activity in the short term. They  
fear the anticipation of currency depreciation could trigger a vicious  
circle of new capital outflows and yuan weakening. Yet this risk is  
limited given the existing controls on resident capital outflows (which  
have been reinforced since 2016, and then adjusted depending on  
th  
6
EcoPerspectives // 4 quarter 2019  
economic-research.bnpparibas.com  
Credit is not responding much to monetary easing  
3- Interest rates on bank loans do not decline much  
Investment and private consumption growth continued to falter in  
Q3 2019. In value terms, investment rose by only 5.5% y/y in the  
first eight months of 2019, compared to 5.8% in H1 2019. Growth in  
retail sales slowed to 7.5% y/y in July-August, compared to 8.4% in  
H1 2019. There are several downside factors: the troubles in the  
manufacturing sector are squeezing corporate profits and affecting  
the job market; food price inflation has surged (+10% y/y in August),  
and growth in bank loans to households has slowed (+16% y/y in  
August compared to +21% at year-end 2017). In this morose  
environment, it is interesting to note that the housing market has  
picked up a bit, with transaction volumes increasing slightly again in  
July-August, while average house price inflation continued to ease  
Weighted average lending rate :  nominal ▬ real  
1Y Benchmark lending rate  1Y MLF rate ▪▪▪ 3M SHIBOR  
%
7
6
5
4
3
2
1
(
+5.3% y/y in August). In the commercial and office real estate  
markets, in contrast, sales volumes continued to slump.  
2015  
2016  
2017  
2018  
2019  
Source: PBOC  
Monetary and fiscal policies have become increasingly expansionist  
since spring 2018 to counter the slowdown in domestic demand  
growth. Monetary and credit policy has been eased continuously  
and cautiously. Banks have been encouraged to increase lending to  
certain corporates, such as SMEs, the healthiest companies and the  
most buoyant sectors; liquidity conditions have been improved,  
thanks to successive reductions in reserve requirement ratios (the  
latest 50bp cut was in mid-September) and bank lending rates have  
been lowered slightly. To increase the effectiveness of its actions,  
the central bank announced a new interest rate reform in August  
factors constraining the growth and efficiency of new loans. Interest  
rates are expected to decline slightly further in the short term, and  
the authorities could try to ease monetary policy further if economic  
growth were to deteriorate further. Even so, this risks having only a  
very mild impact on activity.  
 The impact of fiscal measures should start to be felt  
Growth in public infrastructure investment is beginning to pick up. It  
should strengthen further in the short term given the recent rebound  
in bond issuance by local governments for project financing. Yet the  
authorities have limited room for manoeuvre to boost public  
investment as local governments and their financing vehicles are  
also strapped with high debt (estimated at about 50% of GDP).  
2019: the one-year loan prime rate will no longer be guided by the  
benchmark lending rate, but by the medium-term lending facility  
(
MLF) rate. This change should improve the transmission of  
monetary policy and encourage the decline in interest rates on loans  
to the non-financial sector in the short term.  
As a matter of fact, the weighted average lending rate on bank loans  
has not declined much since the beginning of monetary easing.  
From Q2 2018 to Q2 2019, it narrowed by 28 basis points (bp) in  
nominal terms and by 120bp in real terms (chart 3). Domestic credit  
growth has barely picked up. The rebound in bank lending (which  
accounts for two thirds of total social financing) proved to be short  
lived: after accelerating between H2 2018 and Q1 2019, nominal  
loan growth slowed again from 13.8% y/y in March 2019 to 12.6% in  
August. Banks have remained very cautious in view of the economic  
slowdown, the excessively heavy debt burden of borrowers, and  
high risk of defaults. Credit from non-bank financial institutions  
A series of fiscal stimulus measures have been introduced since  
2
018. Household tax cuts aim to stimulate consumer spending by  
providing direct support for disposable income. These measures are  
geared especially towards low-income households. For example,  
changes introduced over the past year include raising the income  
tax brackets for the lowest income earners. The authorities initially  
estimated that tax cuts would boost total disposable income by as  
much as RMB 660 bn, which could increase private consumption by  
a total of 1.2 percentage points. The positive impact on household  
spending was not visible yet in August’s economic indicators.  
However, the slight improvement in the “new orders” components of  
the PMIs for both the manufacturing and services sectors in  
September seems to suggest that a recovery in private consumption  
growth is possible in the very short term.  
(
shadow banking) has continued to contract, illustrating the  
authorities’ determination to continue cleaning up the financial  
sector. Bond issues were the only type of financing that has  
accelerated gradually over the past year (+11.3% y/y in August).  
As a matter of fact, the authorities have little room for manoeuvre to  
boost credit. Beijing wants to stimulate domestic demand while also  
continuing to strengthen the financial sector’s regulatory framework,  
encourage deleveraging of both financial institutions and the  
weakest state-owned companies, and cool the property market in  
order to improve housing affordability. Excessive debt in the  
corporate sector (which was estimated at about 135% of GDP at  
mid-2019, excluding local government financing vehicles) and the  
already high level of household debt (55% of GDP) are major  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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