Forecasting China’s economic growth rate is said to be the “easiest job in economics”, says Nathaniel Taplin in The Wall Street Journal, because “the figure nearly always dovetails with official targets”.
This week’s release of second-quarter figures was eye-catching nonetheless: the economy grew at its slowest pace in 27 years. GDP expanded at an annual rate of 6.2% during the three months to June, down from 6.4% in the first quarter. Local stocks were unfazed, however; the Shanghai Composite index is still up 19% in 2019.
“Tariffs are having a major effect,” tweeted Donald Trump on Monday. In reality, the US-China trade war has had only a modest effect on growth, says Capital Economics, which estimates that American tariffs have reduced Chinese GDP by approximately 0.3% so far.
Much more significant has been “economic weakness in Europe and many Asian countries” that has hit global trade volumes, according to says Keith Bradsher in The New York Times.
A case in point: last week’s news that Singapore’s trade-dependent economy shrank “at an annualised rate of 3.4% in the second quarter”. Official figures show that Chinese exports fell 1.3% year-on-year in June, with imports down 7.3%.
China’s debt pile keeps growing
Yet these days China’s economy is less dependent on exports than on domestic consumption, which accounts for more than half of the economy. To help consumption along, Beijing has ramped up stimulus in recent months with income and corporation tax cuts, as well as increased lending to small businesses.
There is evidence that “easier fiscal and monetary policy are starting to help”, says Taplin, but investors shouldn’t get carried away. Apparently strong June retail sales were flattered by the temporary effects of changes to car-emissions standards. Real per-capita consumption growth has weakened to 5.2%, down from 5.4% in the first quarter.
Where slowdowns in the Middle Kingdom were once routinely met with “giant stimulus”, ballooning debt levels give Beijing “limited fiscal firepower” this time around, says The Economist. “China’s total stock of corporate, household and government debt now exceeds 303% of gross domestic product,” according to a report published by the Institute of International Finance. That has created dangerous systemic risks. Stoking another lending boom would “be like drinking vinegar to quench a thirst”, agrees The Financial Times. Yet investors should not underestimate the country’s “scale and resilience”. China remains the biggest global source of growth. One extraordinary fact: last year’s Chinese growth alone was “equivalent to the size of the entire Australian economy”.