How China is positioning for slower growth

Shanghai

The Chinese authorities seem to have acknowledged that lower growth will be inevitable. We look at how they have increased their room for manoeuvre economically and politically.

The National People’s Congress (NPC), China’s national legislature, met from 5th to 20th March. This conference traditionally provides the senior leadership group with the opportunity to set policy and economic targets for the year ahead. This time it seems the officials are trying to prepare everyone for a transition to lower growth.

For now though, we think strong global demand will continue to support Chinese growth. Our forecast for 2018 is unchanged at 6.6%. Growth in 2017 was 6.9%.

Why will growth slow?

Slightly tighter monetary policy is likely to be the culprit for slower growth. This will not be aggressive by any means; it will be more of a gentle squeeze in certain areas to contain financial risk.

The biggest pressure will likely be felt in the property market. The country’s central bank, the People’s Bank of China, believes mortgage growth has been “slightly too fast” so we can expect some regulatory changes on this front. We also forecast a slowdown in overall credit growth, which will have a negative impact on the real estate sector.

What will support growth?

The government will maintain an expansionary approach to fiscal policy, which will help growth. An expansionary policy typically sees an increase in government spending and/or a decrease in taxes.

The government’s increased spending will go towards some key tax policy changes. These include a simplification of VAT (with reductions for smaller firms, who will also benefit from a cut to the corporation tax rate) and lower social welfare contributions.

This should boost the private sector, with growth in private sector investment also expected. The goal seems to be to support the private sector in order to counter the likely slowdown in real estate.

Liberalisation also helpful

Given escalating trade tensions, particularly with the US, it is no surprise that the NPC also discussed opening up a range of Chinese sectors to foreign investment, which would be helpful for economic growth. The question of lowering import tariffs on consumer goods was raised once again. This would make things cheaper for the consumer, which would also help boost GDP.

While these moves address some US concerns, it is unlikely to impact the trade balance much and they are probably not enough to dissuade the US from imposing duties on Chinese imports. This would make Chinese goods less competitive in the US market and may mean that China can’t trade as much with the US, to the detriment of overall economic growth.

What the fiscal measures above do show though, is how important China’s plan to upgrade its manufacturing sector is to the authorities. This is what the proposed US tariffs are in response to: China’s efforts to move itself up the value chain (ie producing higher value and more profitable goods).

Increased room for manoeuvre

Overall, we think the NPC shows that the authorities remain positive about Chinese economic growth, though that should be no surprise. That said, they seem to have acknowledged that lower growth will be inevitable. By gradually moving away from hard targets the authorities are increasing their room for manoeuvre economically and politically.

 


The above article was previously published by Schroders on 5th April 2018