While it will hardly come as a surprise to anyone following China's dismal attempts at reflating the economy, which on Monday we learned translated into the lowest Aggregate Financing print since the series was established...
... reaffirming Beijing's impotence at stimulating the all-important credit impulse which is barely above cycle lows...
... today a Beijing-based think tank has become the first Chinese economic research institute linked to the government to predict that China’s economic growth rate will slow below 6.0% next year.
The National Institution for Finance and Development (NIFD) on Wednesday said that China’s economic growth rate will slow to 5.8% in 2020 from an estimated 6.1% this year, a number which is already quite ambitious, not to say artificially goalseeked.
This, as the SCMP notes, is at the bottom end of China’s target range of 6 to 6.5% growth for 2019, and further indicates the continued downward pressure on the economy from the trade war with the United States as well as domestic headwinds.
“The economic slowdown is already a trend,” said former central bank adviser Li Yang, who heads the institute that is affiliated to the Chinese Academy of Social Sciences (CASS). “We must resort to deepened supply-side structural reform to change it or smooth the slowdown, rather than solely rely on monetary or fiscal stimulus.”
The institute’s forecast is in line with the International Monetary Fund, and indicates the challenge that policymakers face to achieve the above 6% growth rate needed in 2019 and 2020 to reach the government’s goal of doubling GDP in 2020 compared to its 2010 level.
According to the NIFD, China’s exports will be "negatively affected for a long period amid the slowing global economy, private investment may be dampened by trade war uncertainties, while the effects of countercyclical policies will only begin to be evident in the first quarter of next year."
Li said the government’s fiscal deficit problem will stand out in the future, adding that the government may have to issue more bonds to fulfil its expenditure responsibilities. This could demand more bond holdings by the central bank - i.e., a more aggressive monetization of the deficit - and better coordination and institutional arrangement between fiscal and monetary authorities, suggesting that China may well be the first nation to launch some version of MMT.
“The macro control regime needs to be revamped,” he added.
China’s economy started to slow from 2011, with its growth rate already dropping to 6.0% in the third quarter of 2019, the slowest rate since quarterly growth data was first published in 1992. The continued slowdown has stirred market discussion over whether – and how far – Beijing should loosen its policy stance to support growth, as has occurred in many developed countries, including the United States.
However, with China's debt already surpassing 300% according to the IIF...
... a continued rise in the nation’s debt level is keeping a lid on policymakers’ leeway. New NIFD data showed that the government’s macro leverage ratio – the total debt to gross domestic product – has recorded an “unsatisfactory” rise so far this year. Government leverage rose 0.7 percentage point to 39.2 per cent in the third quarter and climbed by a total of 2.0 percentage points in the first nine months of the year.
According to China's own calculations, the country’s overall debt to GDP ratio rose to 251.1% at the end of the third quarter, up 1.6% from the previous quarter. The increase was led by the household sector, with debt rising 1.0 percentage point to 56.3% in the third quarter.
However, with few other levers to pull and despite the surge in debt, the NIFD called for a bigger central government budget deficit to allow for more expenditure to support the economy. At the same time, additional efforts should be made to reduce the leverage of state-owned enterprises, in particular zombie enterprises and local government financing vehicles.
Zhang Xiaojing, deputy director of the CASS’ Institute of Economics, said the extent of the increase in leverage would depend on the growth rate that the government is trying to achieve: “The pressure for economic stabilization next year won’t be as big [as people think],” he predicted, although that may well depend on the status of the trade war with the US.
The NIFD warned of huge uncertainties over the trade tension between China and the US, while also predicting that the yuan exchange rate would fluctuate between 7.0 and 7.2 against the US dollar next year.
“The tariff war may be basically over in 2020, but the bilateral conflicts won’t end easily,” said Zhang Ping, its deputy director, suggesting that as China joins the US in pursuit of foreign capital to funds it soon to be negative capital account, relations between the US and China are only set to deteriorate.