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China seen heading for sub-6% economic growth as tariffs soar

Sep 03 2019 19:07
Bloomberg News
Chinese President Xi Jinping delivers a speech dur

Chinese President Xi Jinping delivers a speech during the closing session of the National People's Congress at the Great Hall of the People in Beijing on March 20, 2018. (NICOLAS ASFOURI / AFP)

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Economists are downgrading their forecasts for economic growth in China again, to below a level seen as necessary for the Communist Party to meet its own goals in time for its centenary in 2021.

Oxford Economics, Bank of America Merrill Lynch, and Bloomberg Economics on Tuesday all cut their forecasts for gross domestic product growth in 2020 to below 6% as a result of increasing risks from the tariff war with the US. In addition, Bank of America’s Helen Qiao and others are warning that the government’s current approach to stimulus is proving insufficient.

China is refraining from cutting benchmark policy rates or pumping large volumes of cash into the economy even as growth slows to the weakest in almost three decades and the tariff escalation in August adds further headwinds. That’s endangering President Xi Jinping’s ability to claim China has reached a "moderately prosperous society" that has doubled 2010 GDP by next year, as a rate above 6% in 2019 and 2010 would be needed.

Demand for credit has been weak, and while the policy easing since late last year has helped moderate the slowdown, the impact has been small, according to a report by Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. With all the issues facing China, "more policy easing is needed to convincingly stabilize economic growth," Kuijs said.

China’s economic growth will likely slow to 5.7% in the last quarter of 2019 and remain broadly at that pace in 2020, Kuijs said. Output growth softened to 6.2% in the second quarter from a year earlier, close to the lower bound of the government’s full-year target of between 6% and 6.5%. Earliest indicators compiled by Bloomberg showed the economy slowed further in August.

"We now expect China’s growth to slow to 6% this year and 5.6% next year. Our lower forecasts are subject to downside risks, given further threatened tariffs, and uncertainty over how the blow to business confidence from the trade war will play out," said Chang Shu, chief Asia economist, Bloomberg Economists.

Bank of America’s chief Greater China economist Helen Qiao said their 2020 forecast has been cut to 5.7% from 6.0%, and warned of the risk that policy makers are falling behind the curve on support to the economy.

"The key reason for delayed policy response is policy agencies are waiting for the instruction from top decision makers to shift policy stance towards easing," Qiao wrote in a note.

UBS Group AG sees stimulus coming in the form of more monetary easing, but expects policy makers to refrain from boosting the property market unless there’s a significant downturn. Wang Tao, chief China economist, now sees growth of 5.5% in 2020, after cutting the growth forecast on Tuesday for the second time in less than a month, down from 6.1% in early August.

"The risk of further escalation remains significant, which would put additional downward pressure on China’s growth," Wang said, adding that she expects the People’s Bank of China to further reduce reserve-ratios this year but hold off from adjusting the broader benchmark rate.

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