Sun, Nov 04, 2018 - Page 7 News List

China’s aversion to stimulus tested by Trump’s tariffs

With corporate debt running high, and local governments and consumers less willing to borrow, another spending binge is unlikely

By Jeffrey Black and Yinan Zhao  /  Bloomberg

China’s attempt to break free from the debt-financed stimulus of the past is being stress-tested by US President Donald Trump.

As the White House threatens tariffs on everything the US imports from China, policymakers in Beijing are cushioning the economic blow with tax cuts, regulatory relief and investment incentives, rather than the kind of spending and monetary binge seen in 2008 and 2015.

While big bang support cannot be discounted should growth and employment really take a hit, economists for now expect China’s composure to hold, meaning more targeted tax cuts rather than breakneck spending.

“In the past they have been throwing big money via the state-owned enterprises at big infrastructure projects and now it is more about giving money to the people and hoping they will spend it,” Pacific Investment Management Co global economic adviser Joachim Fels said. “We think there will be more fiscal easing over and above what has already been announced.”

China’s leaders from Xi Jinping (習近平) down are politically committed to avoiding a “flood” of stimulus, and a multiyear campaign to curb the rate of debt expansion appears paused, not scrapped.

Xi’s right-hand man on the economy, Chinese Vice Premier Liu He (劉鶴), has long advocated a shift away from credit-fueled growth at all cost and senior officials continue to warn of the dangers of excess debt, even as they seek to channel more money to cash-strapped private businesses.

Underscoring the need for support, economists downgraded their forecasts for GDP growth in the final three months of the year and the first quarter of next year, a Bloomberg survey of 65 analysts published on Tuesday showed.

An official gauge of activity in China’s manufacturing sector worsened last month, data released on Wednesday showed, falling to 50.2 from 50.8 in September, missing the median prediction of 50.6 in a Bloomberg survey of forecasters.

The key question for the economy in the coming months is whether the boost from policies announced this year will kick in with enough force to outweigh the drag from higher duties and the fading effect of a pretariff export rush.

The success or failure of China’s attempts to stabilize its economy matters much more for the rest of the world than it used to, as the nation is “a more balanced contributor to global growth,” Bank of America Merrill Lynch economists Ethan Harris and Aditya Bhave said.

The IMF now calculates that China contributes about one-third of global expansion.

China’s targeted stimulus approach is primarily geared to stoking domestic demand, for instance a tax cut on the purchase of cars, which Bloomberg News reported on Monday.

While that move might dovetail with others aimed at reducing the cost of consumption, like tariff reductions, Chinese households in the biggest cities still face soaring rents and rising outlays for food, education and healthcare.

However, even with the domestic economy pressured, there are two major constraints to enacting more powerful stimulus — debt and the weakening yuan.

Non-financial corporate debt is rising again as a percentage of GDP, following a year-and-a-half of deleveraging from its mid-2016 record, Bank for International Settlements data showed.

Efforts to support infrastructure debt will add to local governments’ debt burdens. And with household leverage rising quickly, consumers are less able to borrow the nation out of trouble than before.

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