China growth – can Beijing buy time?

Image copyright Reuters Image caption China may have to juice its economy

China’s economic prospects are under increasing pressure – and the squeeze is likely to intensify as growth stalls.

But this might not be enough to provide the “required punch” to fight inflation, say the authors of a paper on growing problems in China’s economy.

But global companies, especially emerging market firms, have reason to be optimistic.

A leading Chinese economic think tank has backed this optimistic view.

The authors argue a sharp slowdown in China, coupled with inflationary pressures elsewhere, may force Beijing to adjust monetary policy to support growth.

The downside risk from that, of course, would be a weakening of the world economy.

China’s problems

China’s economic expansion has been slowing for a while, coming to a halt in 2015-16 as policy support for the industry ran its course.

Now, according to research from economists at the well-regarded Bank of International Settlements, growth in China may stall completely in 2019.

Inflationary pressure may be building up in China because of a move by the central bank to ramp up its interest rates, an effort to combat rising asset prices.

Image copyright Reuters Image caption China’s central bank has raised interest rates to slow the equity market

President Xi Jinping has highlighted a move away from an investment-based economy – and Beijing will also put more emphasis on preserving social stability.

But the creeping concern among analysts is that – in line with the country’s One Belt, One Road project to boost regional infrastructure investment – Chinese policymakers’ expansive monetary policy could be sending the wrong signals to Beijing’s peers.

“One Belt, One Road has added to the necessary punch punch in China’s fight against inflationary pressures – it may be possible to keep the punch powder dry to fight inflation abroad, but that may not be enough,” the authors of the report said.

The single biggest threat to growth – both at home and abroad – would be a collapse in the housing market, from excess supply and rising sales prices.

Such a bubble collapse could destabilise both bank balance sheets and foreign exchange reserves. It may already be hitting China.

Beijing has stopped expanding the mortgage sector by expanding its policy of raising downpayments. In the first three months of 2018, new mortgage approvals dropped 3.6%.

External risks

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But even this sort of slowdown could be helpful. The report notes that some central banks are “pruning” their policy accommodation and that may encourage the People’s Bank of China to start expanding its monetary policy even further.

The pressures at home mean the outlook for China’s biggest export market – the United States – is not too bright either.

Dennis de Jong, managing director at currency exchange specialist, said: “Overall, there is not much good news for the United States from this report. There may only be a brief respite from trade friction, but it remains to be seen if Trump will be able to push through with his America First agenda.”

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