Perspectives

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EcoPerspectives // 1st quarter 2019  
15  
economic-research.bnpparibas.com  
China  
Fiscal stimulus: the best option  
Economic growth slowed to 6.6% in 2018 from 6.8% in 2017 and should continue to decelerate in the short term. The extent of the  
slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on  
Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s  
excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial  
regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this  
clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.  
In Q4 2018, real GDP growth slowed to 6.4% year-on-year (y/y),  
1
- Growth and inflation  
down from 6.8% in Q1 2018. The Chinese slowdown has been  
confirmed and is bound to continue in the short term. The size of the  
slowdown will depend on the evolution of China’s trade relations  
with the United States, as well as on the authorities’ actions to  
stimulate domestic demand. Although uncertainty persists over the  
signing of a trade agreement between Washington and Beijing  
anytime soon, the orientation of Chinese economic policy has  
become much clearer in recent weeks: counter-cyclical measures  
will be given priority in the short term.  
GDP Growth (%)  
Inflation (%)  
Forecast  
6.6  
Forecast  
6.7  
6.8  
6.2  
6.0  
2
.5  
2
.0  
2.1  
18  
1.9  
19  
1
.6  
Industry facing difficulties due to declining demand  
The slowdown in the industrial sector worsened towards the end of  
the year. Industrial production slowed from 6.9% y/y in January-May  
to 6% in June-August, and to 5.7% in September-December (chart  
1
6
17  
18  
19  
20  
16  
17  
20  
Source: National accounts, BNP Paribas  
2
). The poor performance of exports and retail sales, especially in  
2
- Worsening slowdown in the industrial sector  
 Industrial production, volume, y/y, %  Producer prices, y/y, %  
• • Manufacturing PMI (rhs)  
the automobile sector, continue to darken prospects in the very  
short term. In December, manufacturing PMI dropped below 50,  
notably due to the sharp drop-off in the “new orders” and “export  
orders” components. The industry must also deal with the rapid  
decline in producer price inflation (+0.9% y/y in December,  
compared to +4.7% in June), in line with the decline in commodity  
prices and with the reduction in demand and production capacity  
utilisation rates. As a result, growth in profits of industrial enterprises  
has deteriorated sharply since Q3 2018.  
1
2
56  
55  
54  
53  
52  
51  
50  
49  
48  
47  
10  
8
6
4
2
Performance in the services sector is stronger. After losing  
momentum in Q1 2018, services growth has recovered slightly,  
bringing full-year 2018 growth to 7.6%. The PMI indexes also picked  
up towards the end of the year.  
0
-
2
-4  
-6  
Exports levelled off recently, notably due to higher US trade tariffs1.  
2013  
2014  
2015  
2016  
2017  
2018  
After a Q3 rebound, fuelled in part by the acceleration of shipments  
to the United States in anticipation of higher tariffs and by the yuan’s  
depreciation, sales of Chinese products slowed sharply in  
November (+5% y/y in value, after averaging +13% in the first 10  
months of 2018) and contracted in December (-5%). Imports have  
Source: NBS  
followed the same trends. Foreign trade should continue to contract  
at least through the first part of 2019. Thereafter, trends will largely  
depend on the result of current trade negotiations between  
Washington and Beijing.  
1
About half of exports of Chinese goods to the US (USD 250 bn) is actually hit  
by tariff hikes of between 10% and 25%. The latest 10% increase was  
introduced in September on about USD 200 bn in merchandise sales. If Beijing  
and Washington fail to reach an agreement by March (the end of the truce),  
tariffs could be raised by 25% on these USD 200 bn in goods, or even extended  
to cover all Chinese exports. If an agreement is reached and Beijing makes  
concessions on the purchase of US goods (which is now our central scenario),  
the status quo could be maintained or recent tariff increases could be revised  
downwards.  
Household consumption growth is slowing. Retail sales growth  
dropped to an all-time low in Q4 2018 (+8.3% y/y in value), hit by  
the downturn in durable goods purchases (reflecting the decline in  
housing sales) and the contraction in automobile sales (in line with  
the expiration of fiscal incentives and the structural slowdown in the  
EcoPerspectives // 1st quarter 2019  
16  
economic-research.bnpparibas.com  
sector). Online sales have also slowed but remain buoyant (+25% in  
3
- The easing in credit conditions remains timid  
2018), and the same can be said for the consumption of services.  
Total financing of the economy, y/y, %  • • Bank loans, y/y, %  
7-day repo rate, % (rhs)  Average interest rate on loans, % (rhs)  
Recent downward trends can also be blamed on the moderation of  
consumer credit (in a tighter regulatory environment), the erosion of  
household confidence, and another drop in income growth after the  
improvement of 2017. Weaker wage dynamics can be attributed to  
the troubles facing industry. In the short term, only stimulus  
measures can bolster household demand.  
2
1
1
1
1
1
0
8
6
4
2
0
8
7
6
5
4
3
2
1
Economic policy easing is beginning to boost investment in  
infrastructure projects. Investment picked up in Q4 2018 after local  
governments were authorised to make more bond market issues for  
project financing. However, already heavy debt will continue to  
restrict severely their manoeuvring room. In the manufacturing  
sector, investment recovered in 2018 despite rising trade tensions,  
but should weaken again in early 2019 as a result of weakening  
exports and the deterioration in corporate profits. Real estate  
investment is unlikely to make a notable rebound, since volumes of  
transactions have declined since September 2018 and because the  
authorities should avoid overly easing the prudential regulations in  
the property sector. As a matter of fact, promoting a balanced and  
healthy development of the housing market and the combat against  
speculation remain top priorities of the government. All in all, the  
rebound in total investment (to 7.9% y/y in value terms in October-  
November 2018, from 5.4% in the first 9 months of the year) is likely  
to be mild in the short term.  
2016  
2017  
2018  
2019  
Source: Central bank  
and the banks. Moreover, over the past two years, Beijing has  
pursued efforts to reinforce financial regulation, improve the health  
of state-owned companies and clean-up the real estate sector. It  
probably wants to avoid disrupting this process despite the  
redefinition of its priorities. Monetary policy is also constrained by  
the risk of capital flight and downward pressure on the yuan, at a  
time when 1) China’s external constraint is already being tightened  
due to the substantial narrowing in the current account surplus, and  
The authorities must give preference to fiscal  
stimulus  
2) currency depreciation would further feed trade tensions with the  
United States.  
In recent months, the authorities have launched a series of contra-  
cyclical policies that should help contain the slowdown in economic  
growth. Monetary policy has been eased very cautiously. A new  
Faced with this situation, the central government will have to make  
more use of fiscal measures to stimulate demand without  
aggravating financial instability risks. It has the capacity to act, given  
the moderate level of its deficits and debt (estimated at 16% of GDP  
at the end of September 2018). Household and corporate income  
tax cuts have already come into effect since 1 January 2019, and  
other measures are likely to be announced soon, notably a lower  
VAT rate and new fiscal incentives for household purchases of cars  
and durable goods.  
targeted” financing facility has just been announced, essentially  
aimed at encouraging bank lending to small and mid-sized  
enterprises, and reserve requirement ratios continue to be lowered  
(
liquidity injections via open-market operations have also increased  
in recent days (but one of their main objectives is to prepare to  
respond to peak seasonal demand for liquidity).  
to 13.5% in January 2019, down from 17% in March 2018). Net  
The authorities are seeking to lower credit costs for corporates,  
stimulate lending and facilitate financing of local government  
investment projects. So far, money market rates have not  
decreased much (the 7-day repo rate has averaged 2.49% since  
early January, down from 2.63% in Q4 2018) and the average  
lending rate barely declined in 2018, after reaching 5.94% at the  
end of September (chart 3). The acceleration in inflation helped  
ease real interest rates through October, but this trend has since  
been reversed. Moreover, the increase in total credit to the economy  
continued to slow through the end of 2018 (reaching 9.8% y/y, down  
from 11.1% in mid-2018). This nonetheless masks a slight upturn in  
bank loan growth and bond financing in Q4 2018, which was more  
than offset by the contraction in shadow banking activities.  
Yet if the economic slowdown were to continue in the very short  
term, the authorities probably wouldn’t hesitate to ease further  
monetary policy and to accelerate the implementation of  
infrastructure projects. More time will thus be needed to absorb the  
excessive debt burden of corporates and local governments.  
The timid easing of credit conditions reflects several problems. First,  
the debt excess of the economy and the low efficiency of new credit  
severely restrict the manoeuvring room of the monetary authorities  
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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