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”.