Emerging

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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
China  
Which growth engines could pick up the slack of exports?  
The Chinese authorities have responded to the economic slowdown and US trade barriers by loosening monetary policy and letting  
the yuan depreciate in recent months, while considering fiscal stimulus measures. With policies to boost demand, the economic  
growth slowdown is likely to continue at a moderate pace in the short term. Any rebound in investment, however, is likely to be  
limited, restricted by the deterioration of export prospects, corporates’ excessive debt, industrial restructuring measures and  
Beijing’s determination to promote healthier development in the real estate market. As to private consumption, it may not be strong  
enough to pick up the slack.  
US trade barriers are striking Chinese industry at a wrong time.  
Firstly, the world market share of China’s export sector has been  
declining for the past two years (reaching 13% in 2017), principally  
due to the erosion of its cost competitiveness. Moreover, export  
growth has lost steam since early 2018. So far, this slowdown has  
been in line with the electronics cycle and less dynamic world  
demand, and not due to US trade barriers. To the contrary, growth  
in exports to the US even picked up between June and September,  
probably due to the acceleration of shipments in anticipation of  
higher tariffs (chart 2). Secondly, for several months now, Chinese  
corporates have been experiencing some difficulties due to tighter  
domestic credit conditions and the economic growth slowdown. This  
has been illustrated by the upturn in non-performing loans in  
commercial banks’ balance sheets and by the rising number of  
defaults in the bond market.  
1
- Forecasts  
2
016  
2017 2018e 2019e  
Real GDP growth (%)  
6.7  
6.9  
6.4  
6.1  
Inflation (CPI, year average, %)  
Official budget balance / GDP (%)  
Central government debt / GDP (%)  
Current account balance / GDP (%)  
Total external debt / GDP (%)  
Forex reserves (USD bn)  
2.0  
3.8  
1.6  
2.1  
1.9  
-
-3.7  
-3.3  
-3.6  
16.1  
1.8  
16.3  
1.4  
18.1  
0.6  
20.2  
0.1  
12.7  
14.2  
14.3  
15.2  
3 011  
3 140  
3 041  
2 853  
Forex reserves, in months of imports  
Exchange rate USDCNY (year end)  
18.6  
6.9  
17.0  
6.5  
14.8  
6.9  
13.3  
6.9  
e: BNP Paribas Group Economic Research estimates and forecasts  
The protectionist shock further darkens China’s export and  
economic growth prospects. We have revised downwards our real  
GDP growth forecast for 2019 to 6.1%, compared to our previous  
estimate of 6.3% made last quarter. We have not changed our 2018  
forecast of 6.4%. As a matter of fact, even if there is a high risk that  
US tariff hikes will be extended  at least temporarily  to all  
Chinese exports (about half are currently targeted by tariff increases  
of between 10% and 25%), the economic slowdown should remain  
2- Export growth is losing steam  
Merchandise exports in USD, y/y, 3-month moving average:  
Total  • • US  European Union  Asia  
%
0
2
15  
1
moderate in the short term .  
10  
5
Merchandise exports to the US account for 19% of China’s total  
exports, and only 4% of its GDP. The contribution of foreign trade to  
GDP growth has diminished over the past decade, which should  
reduce the direct impact of the current shock. Yet the export sector  
is still a key engine of economic activity because private  
consumption is not solid enough to pick up the slack and because  
the export industry’s performance has gearing effects on the rest of  
the economy, via investment, the job market and thus consumption.  
As a result, the expected export growth slowdown could strain the  
needed process of expansion in private consumption.  
0
-5  
-
10  
15  
-
2014  
2015  
2016  
2017  
2018  
Source: China General Administration of Customs, BNP Paribas  
Which policy measures to help absorb the shock?  
since Q2 2018, mainly through liquidity injections in the financial  
system (on 7 October, the government announced that reserve  
requirement ratios would be lowered again to 14.5% from 15.5%).  
Retail banks are being encouraged to step up lending, notably to  
small and mid-sized companies. This monetary policy loosening  
represents a major policy shift: since year-end 2016, the authorities’  
explicit priority was to reduce the risks of financial instability and to  
deleverage state-owned enterprises. In the short term, this could  
Consequently, the authorities are expected to implement an  
economic policy mix that will help reduce difficulties of export  
corporates and boost domestic demand. Yet they have relatively  
little manoeuvring room. Monetary policy has been loosened slightly  
1
For more on the recent economic growth slowdown and the impact of US  
protectionist measures, see EcoPerspectives, BNP Paribas: China  Concerns,  
Q3 2018 and China Not the right time for a trade war, Q2 2018.  
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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
slightly aggravate the China’s already excessive debt (non-financial  
sector debt was estimated at 226% of GDP in mid-2018 ). Even so,  
improving financial sector regulations, downsizing shadow banking  
activities and reducing the sources of vulnerability in the financial  
system are bound to remain top priorities. Consequently, monetary  
policy easing measures are likely to remain very cautious.  
3
- Fragile rebalancing process  
2
Real GDP, y/y (rhs) and contribution to GDP growth (lhs)  
Investment  Consumption  Net exports  
pp  
%
8
14  
12  
10  
8
6
4
2
0
2
4
China’s exchange rate policy has also evolved since Q2 2018. The  
yuan has lost 9% against the USD and 4% in nominal effective  
terms between the end of March and the end of September, after  
appreciating over the previous 15 months. Against the backdrop of  
US monetary tightening, a stronger dollar and currency depreciation  
pressures in emerging markets, the authorities have let the yuan  
depreciate to offset partially the negative effects of higher tariffs on  
the export sector. If new protectionist measures are introduced, the  
yuan could weaken further. Yet Beijing will have to limit the use of  
the exchange rate policy to avoid aggravating tensions with  
Washington and prevent yuan depreciation pressures, which could  
trigger a vicious circle of capital outflows, new pressures on the  
currency and financial volatility.  
6
-
-
4
2
2004  
2006  
2008  
2010  
2012  
2014  
2016 S1 2018  
Source: National Bureau of Statistics of China , BNP Paribas  
Lastly, on the fiscal policy front, the authorities are expected to  
implement tax incentives to boost corporate and household demand  
and measures to stimulate investment in public infrastructure.  
Central government finances are solid enough to absorb any  
deterioration: after improving slightly to 3.3% of GDP in 2018, the  
fiscal deficit could swell to 3.6% in 2019, and its debt should hold  
close to 20% of GDP. In contrast, local governments, which  
continue to fund most infrastructure projects, are constrained by an  
already heavy debt burden (44% of GDP, including financing  
vehicles). Consequently, even if the authorities intend to develop  
public-private partnerships and to increase strongly new local  
government bond issues (to RMB 1000 bn in H2 2018, up from  
RMB 333 bn in H1), the rebound in infrastructure investment is likely  
to be limited (the nominal growth rate dropped from 19.8% y/y in  
January-August 2017 to 4.2% in the same period in 2018, and is  
likely to remain below 10% in the short term).  
weakened from 10% y/y in mid-2017 to 6.6% in August 2018,  
notably due to the expiration of tax incentives on automobile  
purchases and the downturn in durable goods purchases. Yet  
households benefited from a slight upturn in real wage growth in  
2017 (estimated at 7.1%), and the consumption of services has  
increased, as suggested by the solid revenue growth of services  
enterprises. This means the sources of growth have continued to be  
rebalanced slowly, fuelled primarily by the expansion of services. As  
a matter of fact, the combined contribution of public and private  
consumption to real GDP growth rebounded to 5.3 percentage  
points (pp) in H1 2018, after declining to 4.1 pp in 2017 (chart 3).  
However, the export growth slowdown is bound to hit the job market  
in the short term, and the resulting deceleration in wage growth risks  
weighing on household spending. In addition, the development of  
China’s private consumption continues to be hampered by a very  
high household savings rate (40% of revenues, and national savings  
represent 46% of GDP). Even if social welfare and housing reforms  
are gradually implemented, Chinese households will maintain high  
savings to cope with the still very high cost of housing, education,  
healthcare and retirement. Lastly, household debt has increased  
rapidly in recent years, reaching 49% of GDP in Q1 2018, and the  
debt servicing burden could soon begin to cut into their budgets.  
Can private consumption pick up the slack from  
exports?  
The rebound in investment on other key sectors is also likely to  
remain mild. Investment in the manufacturing sector (+7.5% in  
January-August 2018) will be restricted by deteriorating export  
growth prospects and the need to rein in corporate debt, as well as  
by industrial restructuring measures to reduce excess production  
capacities and to shut down the most polluting factories. Investment  
in the real estate sector (+7.9% in January-August 2018) will be  
restrained by the authorities’ efforts to promote a healthier property  
market development and to curb house price inflation.  
That leaves private consumption. It accounted for only 39% of GDP  
in 2017 and might not be solid enough to pick up the slack from  
investment and external demand. Moreover, it is also likely to be hit  
by the slowdown in exports. Growth in volumes of retail sales  
2
Estimates are based on “social financing” data and local government bonds,  
and exclude the central government.  
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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