Economic growth in China slowed again in the fourth quarter of 2018 as spillovers from both financial deleveraging earlier in the year and the trade dispute with the United States continue to weigh heavily on economic activity. Although policy easing is preventing the economy from decelerating sharply, growth will remain lackluster in 2019, hit by a slumping global economy and ongoing trade tensions with the U.S.
Dour economic data as sanctions begin to bite
Chinese exports fell by 4.4 percent year-on-year in December, contrasting sharply with the 3.9 percent expansion in November. The decline was the worst performance in two years and significantly below market expectations of a 3.0 percent increase. December’s export data signals that the front-loading of shipments that shored up export growth in recent months has finally ended as U.S. trade tariffs take hold.
Chinese imports in December fell 7.6 percent over the same month in 2017, which contrasted with November’s 2.9 percent increase. The reading undershot the 5.0 percent expansion that market analysts had forecast and represented the sharpest contraction in over two years. Weak domestic demand and a sizeable decline in oil prices were behind the weak import number.
Trade tensions with the U.S. are also unsettling China’s manufacturing sector, which had already been waning prior to the tariff impositions. China’s manufacturing Purchasing Managers’ Index (PMI) — a composite metric capturing the performance of large manufacturing firms — fell below the 50 point mark in December 2018, indicating a contraction in activity for the first time in 18 months, with weaker export orders contributing to the decline. Even in aggregate terms, manufacturing output growth in December 2018 slowed to 5.5 percent year-on-year from 6.1 and 5.6 percent in October and November respectively.
China’s economy is expected to lose momentum in 2019
The impact of the U.S. tariffs is expected to be more pronounced in 2019 as China’s economic growth prospects appear to have received a rude setback right at the outset. Data recently released by its National Bureau of Statistics (NBS) for the last quarter of 2018 report GDP growth at 6.4 percent year-on-year. With this, GDP growth for 2018 amounts to a paltry 6.6 percent, a 28-year low that barely scraped by the politically mandated minimum of 6.5 percent.
Continued deceleration in the world’s second-largest economy is expected through the first half of 2019, dragged down by the end of front-loaded exports, slowing global demand, and U.S. tariffs on Chinese shipments, holding GDP growth to just 6.2 percent for the year. The picture is expected to be especially bad for small and medium-sized manufacturers — the traditional engine of growth for China over the past 30 years.
Compounding the situation is Beijing’s capacity to manage a growth slowdown. The modest easing of monetary policy over the past year has reportedly not translated into adequate credit growth, inspiring fears in some quarters that the economy may be facing a liquidity trap. Beijing wants to avoid being seen as flooding the market with credit to prop up growth as it did in the past. However, further monetary easing also raises problems as yields are already near parity with those in the U.S., raising outflow pressures on the yuan. Furthermore, there is evidence that potential tax and interest rate cuts will be less stimulative than in the past as more of the increased income is saved.
Trade worries and the threat of additional U.S. tariffs
Beijing has downplayed the impact of Washington’s 10 percent tariffs on US$200 billion worth of Chinese goods that took effect in September. But the evidence from inside China is becoming increasingly clear: The trade dispute is compounding an already weak domestic economy. China’s economic growth has fallen to its slowest pace in almost 30 years, as Beijing struggles to carry out extensive spending activities to shore up the real economy while mitigating the debt uptick.
Washington’s threat to impose additional 10 percent tariffs on US$200 billion of Chinese products in March looms large as U.S. negotiators and their Chinese counterparts have yet to break the deadlock, which includes discussions of forced technology transfers, cyber spying, and state-directed investments. A crucial component of any progress in the talks is agreement on a mechanism to verify and enforce China’s follow-through on any structural economic reforms, a requirement that could maintain the threat of U.S. tariffs on Chinese goods over the long-term.