Perspectives

The year starts with a reprieve

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EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
China  
The year starts with a reprieve  
In 2019, economic growth slowed to 6.1%. Total exports contracted and domestic demand continued to weaken. The year 2020 is  
getting off to a better start as activity shows a few signs of recovering and a preliminary trade agreement was just signed with the  
United States. Yet economic growth prospects are still looking downbeat in 2020. The rebalancing of China’s growth sources is  
proving to be a long and hard process, and economic policy is increasingly complex to manage. Faced with this situation, Beijing  
might decide to give new impetus to the structural reform process, the only solution that will maintain the newfound optimism and  
boost economic prospects in the medium term.  
Real GDP growth slowed to 6.1% in 2019 from 6.6% in 2018. This  
1
- Growth and inflation  
slowdown can be attributed to both declining exports and sluggish  
domestic demand (charts 1 and 2). Although the most recent activity  
indicators and the first trade agreement signed between the US and  
China provide some ground for optimism as the year gets underway,  
economic growth should continue to slow in 2020.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
6.8  
6.6  
6
.1  
5
.7  
5.8  
While economic policy has become increasingly accommodative  
over the past two years, the authorities have remained very prudent.  
They have very little manoeuvring room given the economy’s debt  
excess and the need for ongoing efforts to clean up the financial  
system, state-owned enterprises and the housing market. In  
response to deteriorating economic growth prospects and the  
increasing difficulties of basing a stimulus policy on credit, the  
authorities have resorted to fiscal measures to support corporates  
and households. Might trade tensions with the US and the difficult  
process of rebalancing the sources of growth also encourage the  
authorities to give priority to structural reforms?  
3
.5  
2
.9  
2
.1  
1.6  
1.5  
21  
17  
18  
19  
20  
21  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- Economic growth slowdown is broad-based  
y/y % change in value terms, year-to-date, 3-month moving average  
2019: external shock and the difficult transformation  
of China’s growth model  
 Retail sales ••• Fixed-asset investment  Exports of goods (rhs)  
25  
20  
15  
10  
5
0
30  
20  
10  
0
Chinese exports were hard hit by higher US tariffs and the decline in  
global demand in 2019. Merchandise exports to the United States  
plunged by 12.9% (in USD value terms) compared to 2018, while  
total exports remained virtually flat (-0.1%). Although foreign trade  
made a positive contribution to GDP growth in full-year 2019, the  
export sector’s troubles have had a big impact on the rest of the  
economy. Investment in the manufacturing sector rose only 3.1% in  
value terms in 2019: the investment growth slowdown sharpened  
due to worsening prospects for sales and weakening earnings.  
Meanwhile, private consumption has been hit by the industrial  
slowdown’s impact on the job market and confidence. Average real  
household income slowed to 5.8% in 2019 from 6.5% in 2018,  
especially since consumer price inflation accelerated (reaching  
-10  
-20  
2012 2013 2014 2015 2016 2017 2018 2019  
Source: NBS, General Administration of Customs  
4
.3% y/y in Q4 2019). Inflationary pressures mainly reflected the  
surge in pork prices, which doubled between Q4 2018 and Q4 2019,  
driving up food price inflation (+17.3% over the same period). In  
contrast, core inflation eased from 1.8% y/y in Q4 2018 to only 1.4%  
in Q4 2019, a sign of sluggish domestic demand.  
The accumulation of these negative factors explain why household  
spending growth has not picked up much in recent months despite  
fiscal stimulus measures. As a result, growth in retail sales volumes  
and online sales of goods and services barely levelled off in  
November-December 2019 (at 4.9% y/y and 12%, respectively).  
Automobile sales, which account for about 10% of total retail sales,  
have continued to decline albeit at a slower pace than at the  
beginning of the year (-2.5% y/y in Q4 2019, vs. -12.5% in H1).  
Households were also hit by tighter credit conditions, at a time when  
debt servicing charges are placing an increasingly heavy burden on  
their budgets (this reflects the steady increase in household debt,  
which rose from 28% of GDP at year-end 2011 to 55% at year-end  
2
019).  
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EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
Truce in the trade war  
3- Credit efficiency deteriorated again in 2019  
Yet China’s economic performance seems to have improved slightly  
in recent weeks. Industrial production growth accelerated to 6.2%  
y/y in November 2019 and 6.9% in December, vs 4.9% in July-  
October. This timid recovery is in keeping with the rebound in  
exports, which rose by 7.4% y/y in December after several months  
of decline. The economy should remain somewhat more dynamic in  
the short term. China’s National Bureau of Statistics (NBS) reported  
an uptick in manufacturing PMI (from 49.3 in October to 50.2 in  
November and December), which was largely driven by the rebound  
in the “export orders” component (which rose from 47 in October to  
Credit efficiency (= new credits / change in nominal GDP)  
•• Stock of social financing, y/y % (rhs)  
7
40  
%
Index of credit efficiency  
(increase = deterioration)  
6
5
4
3
2
1
0
35  
30  
25  
20  
15  
10  
5
50.3 in December).  
The United States and China have called a truce in their trade war  
since December and signing a preliminary trade agreement on  
2
005  
2007  
2009  
2011  
2013  
2015  
2017  
2019  
th  
January 15 . This contributed to the better industrial growth  
Source : NBS, BNP Paribas  
performance and renewed confidence of corporates and the  
markets. The fundamental problems behind US-China trade  
tensions are still in place and the next rounds of negotiations  
promise to be very complicated. Nevertheless, the phase 1”  
agreement signed mid-January considerably reduces the risk of  
another increase in US tariffs in 2020. Under the phase 1  
agreement, China has to increase its imports of US goods and  
services by USD 200 bn over the next two years (compared to 2017  
purchases of USD 186 bn), including USD 78 bn in manufacturing,  
USD 52 bn in energy, USD 32 bn in agriculture and USD 38 bn in  
services. China also seems to be ready to make some concessions  
in terms of intellectual property rights and the access of foreign  
enterprises to its domestic market (looser regulations on technology  
transfers, and opening of the financial sector, for example). In  
exchange, the United States simply renounced the introduction of  
new tariffs, and reduced by half the amount of the last tariff increase,  
in effect since September 2019 (from 15% to 7.5% on about  
USD 120 bn in imports). The other tariffs introduced over the past  
two years will be maintained. As a result, the weighted average tariff  
imposed by the US on imports of Chinese goods will decline only  
slightly, from 21% at year-end 2019 to about 19% (vs 3% before the  
outbreak of the trade war). Tariffs will continue to be levied on two  
thirds of these imports.  
stimulate bank loans to corporates via another cut in reserve  
requirement ratios (by 50 basis points to 10% for small and mid-  
sized banks and to 12.5% for the big banks).  
Further stimulus measures might help boost economic growth in the  
short term, but they would also delay the process of cleaning up the  
economy while undermining medium-term growth prospects, notably  
due to the risk of financial instability and the declining efficiency of  
credit and investment. This danger was highlighted by the erosion of  
credit efficiency in 2019, after two years of improvement (chart 3).  
Stepping up structural reforms, in contrast, should limit these risks.  
The most recently announced structural reforms aim to accelerate  
the opening of the financial sector. For example, foreign investors  
would benefit from greater access to asset markets and the limit on  
foreign ownership of certain asset managers and securities firms is  
to be lifted by the end of 2020. Faced with the need to make  
progress in negotiations with the US, but above all given the  
growing difficulties of rebalancing China’s growth sources, Beijing  
might seek to give new impetus to structural reforms in 2020. In  
particular, the continued restructuring of state-owned enterprises  
(
deleveraging, end of implicit state guarantees) and the  
Greater impetus for reforms?  
strengthening of the financial system should help pave the way for  
better capital allocation and stronger medium-term economic growth  
prospects.  
Since 2018, the authorities have loosened their monetary and fiscal  
policies in order to stimulate activity. At the same time, they have  
remained cautious, and still pursued efforts to strengthen financial-  
sector regulations, contain the increase in household debt and try to  
reduce the debt of the most fragile corporates. Last year, in a  
particularly unfavourable international environment coupled with  
disappointingly sluggish domestic demand and growing corporate  
financial difficulties, the authorities were faced with the ever-growing  
dilemma of stimulating growth or reducing debt and pursuing  
1
reforms . The authorities opted to make greater use of fiscal  
stimulus measures and to continue prudent monetary easing actions.  
th  
The most recent measure, effective on January 6 , 2020, aims to  
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See EcoPerspectives: China: what lies behind the rise in corporate defaults?,  
Q2 2019 and China: difficult policy choices, Q4 2019.  
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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