Fra Abn Amro:
- Slowdown deepened in 2019 due to trade conflict, previous deleveraging and slump car sector
- ‘Phase One’ deal US-China reduces uncertainty, but does not eliminate it
- 2020: bottoming out industry will help economy to stabilise
- Impact swine flu on consumer price inflation expected to fade this year
- Monetary and fiscal easing will remain ‘piecemeal’
- China’s debt levels keep rising, but at a lower pace
- Risks remain: US-China tensions, transition risks, Hong Kong/Taiwan, debt burden
On 25 January 2020, the Year of the Rat will start. The rat is the first animal of the Chinese Zodiac and is associated with wealth and surplus. That is a bit symbolic for our macro outlook: after a challenging 2019, we expect China’s economic growth to stabilise in 2020 helped by the Phase One deal between the US and China and ongoing piecemeal stimulus.
‘Stabilisation’ will also be the buzzword for the Chinese authorities this year. According to the annual Central Economic Work Conference held last December, Beijing will put slightly more emphasis on safeguarding growth, while deleveraging will become a bit less urgent. In the press communique the aim to ‘structurally reduce leverage’ was replaced by ‘keeping macro-leverage basically stable’.
Looking back to 2019: China’s slowdown deepens due to US-China trade/tech conflict, …
2019 was a challenging year for China. After a period of relative stability in 2016-17, official real GDP growth has slowed materially since mid-2018, falling to 6.0% yoy in Q3-19 (the lowest pace since 1990). Not surprisingly, this slowdown occurred during a period of escalating US-China tensions. In 2018 the US imposed tariffs on USD 250 bn of imports from China. The situation temporarily improved after Trump and Xi reached a truce in December 2018. However in May 2019, the conflict re-escalated with the US raising existing tariffs on USD 200bn of imports from China and announcing new tariffs on USD 300bn (to be implemented in phases, per 1 September and 15 December). Notwithstanding the de-escalation that took place in the fourth quarter of 2019, the trade-tech war (with its many twists and turns) on balance had a negative impact on Chinese business confidence and domestic spending (both on investment and consumption) in the course of last year.
… previous financial deleveraging and drags from the car sector
The trade conflict is not the only factor that has driven down Chinese growth. Lagging effects from Beijing’s previous financial deleveraging campaign also played a role, as particularly the private sector but also local governments had to deal with more difficult funding conditions. That was for instance illustrated by a rise in corporate defaults. The number of real estate companies filing for bankruptcy, for instance, has risen last year, partly due to a tightening of credit regulations. All of this is also reflected in a slowdown of private investment in the course of last year.
