There are widespread concerns that the world’s second largest economy is losing steam, but overall readings from the Chinese economy over the past few months have been more positive than negative.
China’s official manufacturing purchasing managers’ index (PMI) has begun to stabilise, returning to growth for the first time in seven months. The Caixin PMI survey, which looks at smaller, private companies, showed the fastest pace of expansion in three years. This is good news for economic growth and is in line with the recent bottoming of global manufacturing conditions, signalling global conditions will likely start to tick up in the short-term.
The renminbi is looking stronger, in part because the Chinese government has undertaken fiscal expansion in 2019. It has focussed particularly on infrastructure, which is a long-term driver of Chinese demand. The country’s economic ministers recently flagged that China will be even more proactive and effective in implementing a pro-growth fiscal policy, while monetary policy should remain prudent and neutral. These are further reasons to be positive about Chinese economic growth over the next few years.
As we’ve seen in several key jurisdictions, including in the US and here in Australia, policy makers in China have cut interest rates this year. The main interest rate indicator – the loan prime rate – has been cut by about ten basis points over the past few months. That’s leading to more demand in the Chinese economy.
China’s National Development and Reform Commission, the country’s economic planning agency, has said China is on track to achieve its economic growth, employment, inflation, fiscal revenue and imports and exports targets.
We estimate Chinese economic growth will run at around six per cent over the next one to two years. That’s a relatively solid growth rate, and if achieved, China’s contribution to the global economy will remain sizeable.
Of course, the biggest risk remains the US-China trade war, and what will happen to that trade relationship if US trade tariffs on Chinese imports go ahead on 15 December. The upcoming round of 15 per cent tariffs is set to be levied mainly on consumer goods, and as a result will be a big hit on US consumers. The weakening in demand for these products will also hurt the Chinese economy, with an estimated US$160 billion worth of Chinese exports affected. Over the past 17 months of negotiations, the US will have cumulatively placed tariffs on more than US$350 billion of Chinese goods in total.
We are optimistic there will be some form of phase-one agreement on the trade deal between the two countries over the next few months. A partial resolution would likely mean China agrees to purchase more US agricultural products and will certainly be a step in the right direction, lending added buoyancy to the US and Chinese economies in the short term.
However, until a full resolution in the US-China trade war is reached, disagreements between the two will continue to be of concern in the medium term. The situation continues to be aggravated by American accusations of intellectual property theft and forced technology transfers. The negotiations are also likely to have been complicated by US President Trump’s recent bills supporting Hong Kong’s pro-democracy protesters.
Nevertheless, a recovery in manufacturing should push China’s GDP growth to just over six per cent, keeping it above last quarter’s growth rate which was the slowest pace in 30 years. We anticipate it will only continue to rise again from there.
Subscribe below to SMSF News to receive my latest articlesDiana Mousina, Senior Economist
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