China will need to battle further economic slowdown in fourth quarter

Source:Global Times Published: 2019/10/24 18:58:42

Illustration: Luo Xuan/GT

The Chinese economy is showing an accelerated decline. According to data released by the National Bureau of Statistics (NBS), China's GDP grew 6.0 percent year-on-year in the third quarter of 2019, lower than the average growth rate of 6.1 percent that analysts polled by Reuters had anticipated. It's China's lowest quarterly economic growth since records began 27 years ago, in 1992. 

China reported 6.4 percent growth in the first quarter of this year, and 6.2 percent in the second. All those figures indicate that there is an accelerated slide in China's GDP growth this year.

The economy's three driving forces - investment, consumer spending and trade - have shown a loss in growth momentum over recent months. The growth of investment continues to cool off, with investment in fixed assets (excluding rural households) increasing only 5.4 percent year-on-year in the first nine months, 0.1 percentage points lower than in the January-August period. In September, growth in total retail sales of consumer goods was 0.3 percentage points higher than that of August, but still hovered around low levels rarely seen since September, 2018. 

More importantly, China's exports in yuan-denominated terms fell 0.7 percent in September from a year ago, while imports dropped 6.2 percent year-on-year during the same period. Both exports and imports declined in September. Those indicators suggested demand remained weak in domestic and external markets.

Market analysts generally believe that China can still achieve its 6-6.5 percent growth target set for 2019, but the downward pressure facing the economy can hardly be eased in the coming one or two months because of the weakness in external and domestic demand. Observers hold different opinions about whether economic growth will break the 6.0 percent mark in the fourth quarter.  

With a 6.2 percent GDP growth in the first three quarters, China may not overly rely on counter-cyclical policies to buffer the economy for the rest of the year. The government is likely to focus on enhancing the implementation of existing stimulus policies.

China has derailed from the "new normal" state of its economy, from a GDP-growth perspective. If GDP growth slips past the key psychological level of 6.0 percent in the fourth quarter, this will deliver a blow to investor confidence and have a negative impact on consumer spending and investment, leading the economy into a vicious cycle. Therefore, it is necessary for China to ensure economic growth stays above 6.0 percent through the fourth quarter. China can develop the following measures to maintain steady growth.

First, the economy needs a more expansionary macroeconomic policy. Under the current economic circumstances, it's necessary for China to implement across-the-board, massive stimulus measures. 

Although the nation may have missed out on the best time to implement these measures, they are still expected to produce some effects. Since the beginning of the year, China has gradually loosened its monetary policy, having cut reserve requirements and adopted other market-oriented means. 

But there is a lag between taking these measures and their perceived effectiveness, owing to restraints including the monetary transmission mechanism. In light of an increasingly grim economic situation, interest rate cuts are supposed to be a macroeconomic fine-tuning option. They are likely to produce instant results when it comes to securing 6.0 percent GDP growth. 

Second, efforts are required to further stimulate the domestic consumption market. Data from the NBS showed that in the first three quarters of the year, the final consumption spending contributed 60.5 percent to economic growth, while the contribution of capital formation to GDP growth was registered at 19.8 percent, and that of net exports comprising both goods and services was 19.6 percent. It can clearly be seen that consumption has become the biggest driver of the economy's growth. But multiple factors that weigh on domestic consumption still exist, such as car purchase restrictions. As a main force driving consumption, the car market has continued to lose steam this year, putting a drag on overall consumption growth. Lifting car purchase restrictions can directly bump up consumption. It will also relieve automakers of their plight and ramp up their investment, thereby propping up economic growth. 

Last but not least, the nation should actively push for trade negotiations with the US. A slowdown in the Chinese economy is mainly attributed to insufficient domestic demand. Foreign trade still serves as an economic driver to some extent. But exports have already shown negative growth and if the trend continues, exports are destined to drag on economic growth. Stabilizing trade expectations is therefore of great importance. What's most important is that China-US trade negotiations can progress, thereby gradually eliminating uncertainty. With this, external demand will be stabilized, thereby shoring up the economy.

China's economic growth is derailing from the new normal. Fighting a GDP growth battle in the fourth quarter is a must for China in order to steady market expectations and counteract the economy's accelerated slowdown. Rate cuts, easing car purchasing restrictions and endeavoring to strike a trade deal between China and the US will help the nation claim victory in the battle. 

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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