Features

Cracks spread in China's fragile economy

China's annual economic growth is forecast to dip below 6% in the final quarter of this year and continue to fall into 2020 thanks to weaker exports and tighter domestic credit.

Chinese Lantern Festival in Vietnam © Alamy
Vietnam is likely to be a major growth story over the next decade

The passage through Congress of the Hong Kong Human Rights and Democracy Act, which aligns the US with Hong Kong's protesters, marks a "watershed moment in the escalating cold war" between Washington and Beijing, says Ambrose Evans-Pritchard for The Daily Telegraph. Yet, for all the "ritualistic" diplomatic protests, it probably won't stop the two sides agreeing to a phase-one trade deal.

Keen on a deal

China's CSI 300 index fell back about 1.3% towards the end of last week after Donald Trump signed the Hong Kong bill. The yuan also weakened slightly. Yet China's decision to avoid trade-related retaliation it stuck to banning the US Navy from Hong Kong suggests that it does not want to upend the tariff negotiations.

There are still many sticking points, says Simon Pritchard for Gavekal Research, notably the size of the US tariff rollback and unrealistic American demands that China buy as much as $50bn in US agricultural products.

Yet the pressure is growing on China to conclude an accord. Analysts are forecasting that annual growth will dip below 6% in the final quarter of this year and continue to fall into 2020 thanks to weaker exports and tighter domestic credit. That has sparked a rare public debate in the country about what to do, says Orange Wang in the South China Morning Post.

Prominent economist Yu Yongding recently took to the pages of the Caijing business magazine to declare that "it is time to brake" the "vicious [downward] spiral" before falling growth, investment and consumer spending get worse. Others are calling for an increase in the budget deficit limit above 3% to give more room for fiscal stimulus. Yet Premier Li Keqiang has ruled out a return to the "all-out stimulus" that China tried a decade ago in the wake of the global financial crisis.

China's leaders are well aware that the post-2008 stimulus "became excessive", says Simon Hunt in Halkin's Thought For The Day newsletter. Too much of the lending and spending splurge ended up in "the stockmarket, property and other speculative activities" rather than the real economy.

From local government to state-owned enterprises to a "myriad of small banks", the indebted financial system is now paying the price. Authorities are determined not to make the same mistake again, so small, targeted stimulus measures remain the order of the day.

Look beyond China

Over the past decade about half of all global growth has come from China, notes Louis Gave for Gavekal Research. So dominant has the Middle Kingdom become that "investors have got used to looking at emerging markets through the prism of China". Yet as China tackles its debt overhang and growth slides it is not too much of a stretch to think that the best growth stories in the next decade will be found elsewhere in the likes of "Brazil, India, Indonesia, Russia" and Vietnam.

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