Slowdown to slump fears for China

The deceleration in China's economy has fuelled fears that the boom of the previous decade is turning to bust. Marina Gerner reports.

919-china-mobile-634

Consumers will keep shopping for now

China's annual growth rate declined to 6.5% in the third quarter, the slowest rate since the global financial crisis. The ongoing deceleration in the economy has fuelled fears that the boom of the previous decade is turning to bust. The risk is that the "slowdown suddenly stops being gradual", as Andrew Batson of Gavekal Research puts it.

What a fuss about nothing, says the Financial Times. There has simply been a trivial slowdown from 6.7% in the second quarter to 6.5%, still a perfectly healthy pace. If the government hadn't "made a fetish" of its growth targets, nobody would have noticed.

Some believe this proves that the US-China trade war is biting. But this "is inconsistent with the evidence" says the FT. The value of China's exports in US dollars grew by 14.5%year-on-year in September, and the country has achieved a record $34.1bn trade surplus with the US. Trade friction will eventually bite, but it "has not done so yet". The overall direction of travel is encouraging, with the state removing preferential taxes on car sales and clamping down on the shadow banking system last quarter.

All is well for now...

A sharp immediate slowdown looks unlikely. In October, Chinese stocks rallied when the government announced cuts to personal income tax, notes Louisa Clarence-Smith in The Times. This might be the beginning of a series of tax cuts, according to economists at Deutsche Bank. They believe such measures would help to offset the downside risks from the trade war, and keep growth in 2019 above 6%.

The government has "the will and the tools" to prevent a sharp deceleration in the next two years, agrees a Standard Chartered report. But China's debt should not be ignored and could pose a serious risk in the long run. "Increasing cases of debt defaults, failed land auctions and bailouts of listed companies" could be symptoms of "more deep-rooted problems". Trade tensions with the US, which are expected to drag on, make it more difficult to address domestic weaknesses such as "high leverage".

... but will the bubble subside gently?

The trade spat may not help, but China's problems are mainly "of a homegrown nature", says the Observer. It avoided calamity during the global recession by keeping state-owned companies afloat, while cheap credit fuelled a housing boom. Rising property prices consequently allowed Chinese people to "use their homes as cash machines". This, in turn, boosted demand for consumer goods and durables. In recent years, Chinese policy-makers have been trying to deflate the bubble without plunging the economy into recession.

But as the outlook has clouded over, the government has again resorted to stimulus, while there has been scant sign of the promised shift in emphasis from inefficient state-owned enterprises to private companies. So for now we can expect another uptick in growth. But it will make "a future bust more likely".

Recommended

What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
Tech stock crash – dotcom bust 2.0 is upon us
Tech stocks

Tech stock crash – dotcom bust 2.0 is upon us

It’s carnage in the tech sector as the market crashes. But that spells opportunity for canny investors, says Matthew Lynn
19 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
19 May 2022

Most Popular

Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022