US economy

China’s response to slowing economy in charts


China’s economy was slowing even before the impact of the US trade war threatened Chinese exports. As tariffs bite, downward pressure on the economy will increase.

In response to the slowdown and the headwind from tariffs, China has launched monetary and fiscal stimulus measures while allowing the renminbi to weaken. Below are 10 charts illustrating vulnerabilities in China’s economy and how Beijing is responding. 

Problem: investment slowdown

Investment in fixed assets such as housing, factories and infrastructure remains the largest component of China’s economy, despite some progress in rebalancing towards consumption. 

Following an infrastructure boom in 2016-17 that has helped stabilise investment, spending on roads, railways and sewer systems has slowed amid a crackdown on borrowing by local governments. 

Response: infrastructure stimulus

In July, China’s cabinet instructed local authorities to accelerate infrastructure spending, funded through the sale of a new type of infrastructure bond. Since then, localities have flooded the market with such bonds, though issuance slowed sharply in October. 

Problem: weak lending

A fierce campaign to contain financial risk from excessive debt led to a sharp slowdown in credit flow, especially from shadow banking. Tight financing conditions have contributed to the economic slowdown. 

Private companies have suffered disproportionately from the financing squeeze, with better funded state-owned enterprises nationalising at least 10 struggling private groups this year. 

Response: monetary stimulus

The People’s Bank of China has cut banks’ required reserve ratio three times this year and conducted cash injections through open-market operations, leading to lower interest rates. 

To aid private groups specifically, the PBoC has increased targeted lending to banks that lend to small businesses, most of which are private. The central bank has also offered new funding to state-owned institutions that provide credit guarantees to support bond issuance by private companies. But lending remained weak in October, prompting analysts to forecast additional monetary easing.

Problem: flagging consumption

Consumption is now the main driver of Chinese economic growth, contributing 78 per cent of gross domestic product growth through the first nine months of this year. 

But a slowing housing market, rising household debt and slower wage growth is dragging on consumption

Monthly retail sales growth hit an all-time low in May and remained near that level in October. Auto sales have also slowed sharply

Response: tax cuts

China’s legislature has approved cuts to personal income taxes designed to spur consumption. The cuts, which take effect in January, will be worth as much 0.5 per cent of GDP next year and could boost retail sales by about 1 per cent, according to Deutsche Bank. 

Local media have also reported the state planning agency is considering cuts to the vehicles purchase tax.

Problem: tariffs set to weigh on exports

Chinese exports were unexpectedly strong in October, despite the US imposition of tariffs on $250bn of Chinese goods. 

But front-loading of shipments — in anticipation of the main tariff rate increasing from 10 per cent to 25 per cent in January — contributed to the strong October data. Most analysts believe that exports will eventually slow as a result of the trade war

Response: moderate renminbi depreciation

China has not actively intervened to weaken the renminbi. In fact, the PBoC spent about $32bn in October to boost the currency, its strongest monthly intervention since January 2017. 

But the central bank’s recent interventions have been far weaker than during the last bout of depreciation in 2014-16, when the PBoC spent nearly $1tn to curb renminbi weakness, including an average of $70bn per month during a six-month period in late 2015. 

Analysts say this light-touch approach reflects Beijing’s comfort with moderate renminbi depreciation, which can partially counteract the impact of tariffs on the dollar-denominated price of Chinese goods. The renminbi has weakened 6.3 per cent against the dollar in 2018 and 2.6 per cent against a trade-weighted currency basket

Problem: falling stock market

China’s CSI 300 index, which tracks blue-chips traded in Shanghai and Shenzhen, hit a two-and-a-half year low in mid-October. It has since recovered slightly but remains down 20.5 per cent in 2018. 

Response: prevent forced share sales

Beyond concerns about a trade war and a slowing economy, investors are worried about an overhang of Rmb4.3tn ($618bn) of shares that have been pledged as collateral for loans as of mid-October. The falling market threatens to spark a wave of forced share sales as stock prices approach the levels at which creditors must sell to recover the value of their loans. 

In response, a group 11 of state-owned brokerages has committed to spend Rmb21bn to support borrowers and prevent forced liquidation of collateral. Participation by state banks, insurers and other institutions could eventually raise the size of this rescue fund to Rmb100bn. 

China’s banking regulator has also privately urged banks and brokerages not to liquidate pledged shares, local media reported. 

Twitter: @gabewildau

Additional reporting by Yizhen Jia





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