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.
That atmosphere contributes to heightened risk awareness among small and medium-sized companies, which are struggling to get funding even if they want it.
Meanwhile, the yuan dropped to its weakest level since May 2008 on Tuesday, close to the key level of 7 yuan per US dollar.
The weak yuan would make any large-scale expansion of the money supply perilous for domestic purchasing power. Policymakers will be reticent to let it weaken significantly for fear of broadening the trade war into a new front: currencies.
Given such constraints, and the background goal of curbing credit expansion, the People’s Bank of China has so far refrained from broad monetary easing. Instead, it has sought to reorganize the liquidity available so that it flows to the right places. Growth in outstanding credit, and the money supply, are still slowing.
That leaves fiscal policy as one of the few available circuit breakers and an expansion of the deficit next year a likely option.
China International Capital Corporation Ltd (CICC) sees potential for cuts to the value-added tax rate next year and even a cut to the corporate income tax rate — where China still charges firms more than comparable peers.
CICC economists Eva Yi (易峘) and Hong Liang (梁紅) said that they see the deficit expanding to 3 percent of GDP from this year’s 2.6 percent target.
And unlike the deeply indebted corporate sector, China’s central government still has deep pockets to draw from.
“We expect the Chinese government to continue to roll out stimulus measures that match the weakness in the economy,” Harris and Bhave wrote in a recent note. “This should help ensure a soft landing next year. However, the trade war still has a ways to go and it is much too early to judge the efficacy of the stimulus measures. Stay tuned.”
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