China in 2020: Stability remains key so do not expect rapid deleveraging

China in 2020: Stability remains key so do not expect rapid deleveraging

  • After experiencing rapid slowdown in 2019, Chinese economy is expected to moderate its deceleration in 2020. The general slowdown pattern is in line with the structural trends such as aging, high leverage, and recently, the geopolitical tensions. However, economic slowdown will become more moderate due to both the base effect (2019 has been a difficult year) and the continuation of demand policies (fiscal and monetary).
  • The most concerning aspect for Chinese economy will still be domestic demand. The investment outlook for China’s manufacturing sector is poor because of the uncertainties related to the difficult China-US relations. Also, the government’s restrictions on housing purchases are set to continue in 2019 according to the recent tone set in the latest Central Economic Work Conference. Given the importance of the real estate sector and manufacturing for fixed asset investment, it is hard to see how the investment outlook can improve in 2020. Domestic consumption is also likely to remain sluggish because of the lower household income growth rate and rising household debt.
  • That said, from a cyclical perspective, the low base in 2019 will lend some support to both investment and consumption, especially in the second half of 2020. Also, recent PMI data seems to suggest that there is some recovery of business sentiment, at least temporarily, that could help some investment decisions.
  • Regarding monetary policies, the PBoC will still be constrained by rising CPI at the beginning of the year but the pressure is likely to be relieved in the second part given the rapid accumulation of pork supply. We thus expect the PBoC to become more accommodating in the second part of the year. But the key for monetary policy is still the transmission mechanism, and this is difficult to improve due to the dual nature of China’s banking sector that smaller and less healthy banks lend more to the private sector than bigger banks. No matter how hard the PboC pushes bank credit to the private sector, the effectiveness is still limited. This is all the more worrisome considering that private corporates’ financial health is much weaker than that of state-owned enterprises. If the transmission mechanism cannot be improved and private companies - generally for productive – continue to find it hard or too expensive to get funding, we should not fully discard the PboC using the RMB as a more powerful demand tool. The devaluation of the RMB is likely if US-China relations deteriorate again after their recent agreement to sign the interim deal.
  • Chinese government will also push for more expansionary fiscal policies to support the economy. However, several bottlenecks will be in the way. First, due to the tax cut and slower land revenue growth, the fiscal deficit is likely to further widen and increase government debt. Second, notwithstanding the increase in the upper limits for bond financing, local governments are still unwilling to embark on more infrastructure projects. This might be related to the very negative sentiment or, simply the increasingly low return of such projects.
  • All in all, we expect China’s economic growth rate to fall into the range between 5.5% to 6%.

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LEO INES

Economic and Financial Research on Emerging Markets

5y

A trade deal with the US would resolve a lot of the problems

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