logo-loader

How slow can China go?

Growth is expected to ring in at 6.3% this year

1547813729_shutterstock_309514697.jpg
Domestic sentiment in China will be affected by the results of ongoing negotiations with the US

Markets took on a relatively buoyant mood on Friday after a succession of rumours that ongoing trade talks between the US and China are proceeding well.

The chatter that really cheered investors involved Steve Mnuchin, the Secretary of the Treasury, who was reported to have offered to reduce certain tariffs on Chinese goods in order to draw more concessions from Chinese counterparts in the talks.

If true, that speaks of both an attitude of flexibility in the US negotiating team and a view that China is ready to deal.

And on the whole, it’s not hard to see why the negotiators might come to that view.

The Chinese authorities have recently pumped a significant amount of liquidity into the domestic economy in a bid to keep activity ticking over. On Wednesday 16th January alone a record US$85bn was pumped into the banking system.

This is not the action of a central bank that is sanguine about the economic welfare of the country. Rather, it speaks of significant stresses in the system, brought about in part by the ongoing slowdown in the pace of overall growth.

That growth rates will fall in China is fairly evident. No economy in history has ever sustained the kind of rates that China has been turning in over the past decade or two. So the real question is: how will the Chinese authorities manage the change, as the economy matures and begins to fall into step with the cyclical nature of the world’s more advanced economies.

So far, so good, but it remains a tricky balancing act. According to a poll of 85 economists conducted by Reuters this week, Chinese growth is likely to slow to around 6.3% this year from 6.6% in 2018 and 6.9% in 2017.

On that analysis, there’s likely to be a soft landing which will take place over several years, particularly if current policy to stimulate domestic demand succeeds.

One wild card though is the current stance of the US government, and in particular Mr Trump. If US tariffs really start to bite the Chinese economy could slow faster than expected, and that in turn could have nasty knock-on effects.

For one thing, the current covenant between the ruling party and the people that grants the communists a monopoly on power in return for rising living standards could be called into question. And if the economic competence of the communist party begins to be doubted, then there will be further concerns about the implications for social order.

So, in that context the stakes are much higher for the Chinese negotiators than for the Americans. While the miracle of Chinese economic growth has been bought at the expense of the American working class, it could just be that the revenge of that same working class will bring about the destruction of the entire Chinese political system.

These scenarios are a long way from being played out yet, and certainly run counter to the prevailing Chinese narrative of rising strength, as projected militarily in the Spratly Islands and the wider South China Sea, and economically in the Belt and Road initiative.

And it’s certainly true that China has arrived as a major player on the world economic and political stage in a way that might not have been anticipated thirty years ago.

But China, like all countries with advanced economies will find out that at some stage good times end, at least for a while, and that hard times throw up new challenges.

With growth still at over 6% we are ostensibly still a long way from hard times. Unless of course China can be counted as having already arrived in the club of advanced economies. In which case growth of 6% would surely be regarded as an unsustainable bubble.

 

Add related topics to MyProactive

Create your account: sign up and get ahead on news and events

NO INVESTMENT ADVICE

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is...

FOR OUR FULL DISCLAIMER CLICK HERE

Watch

Things coming together nicely in Greenland, says Bluejay Mining's CEO

Rod McIllree, Bluejay Mining PLC’s (LON:JAY) chief executive, tells Proactive that all three of its projects in Greenland are shaping up nicely with plenty of interest from mining giants. Dundas is the flagship and here a bulk sample of mineral sands has been shipped to a Rio Tinto facility...

1 day, 7 hours ago

4 min read