Economics & Markets

Are economic fears about China justified?

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Many investors are worried about a slowing Chinese economy and its potential to cause major problems for the global economy. But should they be so concerned?

The Chinese economy certainly slowed last year, which prompted worries about a further slowdown. The Chinese share market slumped 30 per cent top to bottom last year on the back of those growth worries. And it is certainly possible that growth will slow a little further in the short term.

Some context

But to put this in context, growth only slowed from 6.8 per cent to 6.4 per cent. So, growth is still fairly solid. Yes, people are debating the quality of Chinese economic data, but even if you look beneath the surface it’s clear the Chinese economy hasn’t collapsed.

Two things have led to slower Chinese growth.

Firstly, Chinese authorities significantly tightened monetary policy in a bid to slow down the rate of growth in debt. That really hurt small business particularly.

Secondly, as 2018 wore on, we saw more and more concern about the trade war with the US, which affected confidence.

The causes of slowing growth are probably 80 per cent domestic credit tightening and 20 per cent trade war. However, if the trade war continues to escalate that’s going to become a much more significant factor.

Good news

The good news is that the Chinese authorities have recognised the growth problem. They have moved to stimulate the economy by relaxing monetary policy and through fiscal policy.

There is also talk of tax cuts of somewhere in the order of two per cent of gross domestic product (GDP). That includes personal income tax and potential cuts to China’s value added tax (VAT).

All of those things seem to be starting to show up in Chinese economic indicators. The share market has rebounded this year – it’s up around 28 per cent since the start of 2019. And there are signs there has been a pick-up in new orders, as well as in investment growth and in credit growth averaged over January and February.

A positive second half

Our view is in the very short term the Chinese economy could certainly slow down a little bit further. But as we go through this year it’s likely to pick up.

That pick up will probably gather pace if, as expected, the US and China announce a trade deal.
The indications on the trade front seem to be becoming increasingly positive. While the earliest an announcement can be made is slipping into April, US trade representative Robert Lighthizer has said negotiations are in the final stage.

A deal would be consistent with our view that Donald Trump doesn’t want to go into a 2020 election with a trade war hanging around his neck, rising unemployment and ongoing decline in the share market.

So, we’re seeing relatively good news starting to come out of China.

It won’t be smooth sailing. Their share market has run well ahead on the upside, so it could go through a short-term correction.

But the outlook for China is reasonably positive and as we go through the second half of the year that should provide support for the global economy, and also Australia.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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