With the slowdown in economic growth in recent years and the external pressure brought about by the U.S.-China trade conflict, the market has been pessimistic about the Chinese economy in 2019. However, according to the macroeconomic data revealed by the authorities in the first quarter of this year, the economic growth rate in China was 6.4 percent — this figure exceeded expectations. As a result, some are beginning to take the more optimistic view that China’s economy has bottomed out and is beginning to rebound, and are also expecting that monetary policy will be tightened. This expectation, coupled with poor communication with regulators, has led to a continuous decline in the capital market.
Based on April’s macroeconomic data revealed by the Chinese National Bureau of Statistics (NBS) on May 15, we need to readjust and make a more objective assessment of the Chinese economy this year.
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Statistics from the NBS showed that the added value of industrial enterprises increased by 5.4 percent year-on-year in April. The growth rate dropped by 3.1 percentage points from the previous month, and fell 0.1 percentage points faster than in January and February. From January to April, the added value of industrial enterprises increased by 6.2 percent year-on-year, and the growth rate was similar to that of the previous year.
In April, the total retail sales of consumer goods reached 3,058.6 billion Chinese renminbi ($443 billion), a year-on-year increase of 7.2 percent, and the growth rate dropped by 1.5 percentage points from the previous month.
From January to April, the country’s fixed asset investment (excluding farmers) was 1,574.7 billion RMB, representing an increase of 6.1 percent year-on-year. The growth rate was 0.2 percentage points lower than that from January-March, similar to the growth rate from January-February, and just 0.2 percentage points more than the previous year. Within that broader figure, private investment totaled 9.3103 billion RMB, an increase of 5.5 percent. In terms of industries, investment in the primary industry (i.e. mining, agriculture, and other raw materials) fell by 0.1 percent year-on-year. Investment in the secondary industry (processing of raw materials, including manufacturing) increased by 2.8 percent; investment in manufacturing industries specifically increased by 2.5 percent. Investment in the tertiary industry (services) increased by 7.9 percent, of which infrastructure investment increased by 4.4 percent.
In April, the total volume of imports and exports was 2,057.7 billion RMB, a year-on-year increase of 6.5 percent. However, April’s figure was 2.7 percentage points down from the previous month. The trade surplus was 93.6 billion RMB, representing a year-on-year contraction of 43.8 percent.
The Outlook for China’s Economy
If we look at this objectively, the macroeconomic data from April show that the economy’s real performance was poorer than expected. The decline in industrial growth may be due to the short-term impact brought about by VAT reform, but the 7.2 percent consumption growth rate marked the lowest point since 2003. This also shows that the power of domestic demand is gravely insufficient to keep China’s economy functioning smoothly. In addition, infrastructure investment, which has been highly anticipated, has grown at a flat rate and has not realized expectations of high growth. As manufacturing investment continues to decline, it shows that real-economy enterprises are not optimistic about the economic outlook. These data also show that the foundation for Chinese economic stabilization is not solid and still faces significant downward pressure. Therefore, China’s higher-than-expected growth in the first quarter may be a short-term phenomenon. The market should not be overly optimistic, but should expect that the Chinese economic situation will face more difficulties ahead.
Anbound’s researchers believe that there are still huge internal and external pressures facing the Chinese economy. From the domestic point of view, the process of transformation and upgrading industry is slow, and there is also the lingering problem of overcapacity. For example, overcapacity in the steel industry has risen again this year, and resulting profits have begun to drop sharply. Reducing capacity is still a matter of urgency. The task of structurally reforming the supply-side is also of great importance. At the same time, China has yet to form a strong domestic market, and demand remains weak. This is evident from the continuous and sharp decline in the Chinese domestic auto industry.
It is also particularly important to point out that the sudden changes in the U.S.-China trade talks have brought new uncertainties to the Chinese economy. China’s foreign trade is the first thing to be affected. Judging from foreign trade data released recently, many provinces and cities in China have seen a continuous decline in exports to the United States. At the same time, more regions in China are starting to turn to non-U.S. market. This transformation may require a certain transition period, and during this period many foreign trade companies will be negatively affected. Second, the uncertainty of U.S.-China trade talks will also affect corporate investment. Many companies may reduce their investment in China or simply shift their companies out of China to reduce their risks. These measures will affect the employment level of China and the income of residents, which in turn affects China’s domestic consumption levels. Lastly, the intensification of the trade frictions will definitely hit China’s financial market. In addition to suppressing the performance of the stock market, the most alarming risk is that the trade friction could trigger the depreciation of the RMB exchange rate, which would lead to a series of domino effects.
As far as this year is concerned, the downward pressure on the Chinese economy will remain. If China does its best to stimulate its economy in response to the downward pressure, it will have no problem in meeting its growth target of 6 percent to 6.5 percent in 2019. However, when 2020 and 2021 come around, the Chinese economy may see another sharp decline. In order to stabilize market confidence in the short term, China needs to maintain the focus and targets of its macro policies and implement loose policies to support short-term economic growth. In the medium and long term, it is necessary to press ahead with reform and opening up, as well as solving the structural problems in the Chinese economy. The quality of the Chinese economy should be improved. However, if the trade conflict between China and the United States worsens, it will bring new pressure on China’s economy and force a re-evaluation of the future economic situation.
The latest macroeconomic data released in April came in below expectations, which is in sharp contrast to the “higher than expected” data in the first quarter. This is a warning sign that assessments of China’s economic situation this year should be more cautious and objective. The continued downward pressure on China’s economy, coupled with the possible deterioration of China-U.S. trade frictions, will pose even greater challenges to China’s economic policies.
Yu Zhongxin has a Ph.D. from the School of Economics, Renmin University of China and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.