Economic fine-tuning must move counterclockwise
China’s economy expanded at 6.5 percent year-on-year in the third quarter, for the first time falling beyond the 6.7-6.9 percent growth range of the previous 12 quarters. This indicates growing downward pressure on the economy. In response to the downward pressure, for the remainder of the year and running into early next year, it is necessary for the country’s macroeconomic fine-tuning to seek the right moment for moderate counterclockwise moves.
There are two main reasons behind the economic slowdown in the third quarter. First, rising external uncertainty weighs on China’s economic growth. Although export data still points to the stability of external demand, as yuandenominated exports were up 6.5 percent year-over-year in the first three quarters, there is insufficient confidence among domestic businesses amid the country’s escalating trade tensions with the US. Their investment plans and manufacturing operations appear to have been affected. Meanwhile, external uncertainty has exacerbated global financial market fluctuations, and China’s stock market and foreign exchange market are no exception.
Second, a slowdown in infrastructure investment growth that stood at merely 3.3 percent in the first three quarters, the slowest pace since 2014, puts a drag on economic growth.
The economy faces further downward pressure over the fourth quarter. The country’s export businesses had apparently rushed shipments during the third quarter, boosting the odds of slowing exports to the US in months to come. Meanwhile, waning demand in European markets and the US Federal Reserve’s move to raise interest rates, leading to flare-ups of vitality in emerging markets, will both have an impact on Chinese exports. It is likely that the country’s trade surplus will continue to narrow in the fourth quarter and the contribution of external demand to economic growth will turn negative for the whole year.
Although macroeconomic policy has been proactive since August with the government pumping up spending on infrastructure investment, thereby pointing to a rebound in infrastructure investment growth in the fourth quarter, the full-year growth is likely to stay much lower than last year. More importantly, growing external uncertainty will continue to disrupt domestic enterprises’ production and investment expectations. It is therefore estimated that the economy will post an expansion of 6.5 percent in the last quarter, underpinning optimism that the economy will meet fullyear growth expectations of 6.5 percent.
Looking further ahead, the economy will face bigger challenges next year, as development and investment growth might continue to slow down and the substantial impact on economic growth from trade friction between China and the US is likely to be evident early next year.
That said, the Chinese economy remains resilient. As the country has practically finished cutting overcapacity, some industries have seen signs of growth recovery. With the nation pushing for a growth model fueled by innovation, innovative businesses also are seeing rapid growth. Especially noteworthy is a raft of pro-consumption policies that will give a boost to consumption.
A higher threshold for collecting personal income taxes, which came into effect on October 1, will lower the tax burden on low- and middleincome earners, spurring consumption. The first China International Import Expo will open in November in Shanghai, potentially ushering in new consumption trends. In addition, the State Council’s newly released guidelines on promoting consumption will give greater impetus to the consumption transition.
If that is the case, the government is advised to move counterclockwise in fine-tuning its macroeconomic policy. It is expected the country’s future macroeconomic policy will become more targeted, and there will be an array of concrete policies for the short term as well as measures devised for the medium- to long-term.
The government needs to implement a more proactive fiscal policy. For one thing, the government should increase spending on infrastructure investment with regards to the application of new technologies, the renovation of cities and the building of transport facilities in remote areas. For another, fiscal policy is supposed to play its part in boosting domestic demand. The government could consider increasing the budget deficit ratio to 3 percent of GDP, raising targeted fiscal expenditures in favor of healthcare, education, environmental protection and rental housing, among others, thereby arresting the softening of domestic demand. Other than that, fiscal policy ought to play a bigger part in guiding and encouraging private investment into major investment projects.
Also, the government should overall maintain a prudent monetary policy. On the one hand, it is supposed to keep ample yet reasonable liquidity without flooding the market, preventing leverage ratios from climbing up. On the other hand, the country can seek the moment to cut reserve requirements for banks, continuing to improve the ability of the financial system to serve the real economy and address fundraising problems facing small and medium-sized businesses.
On top of that, the yuan’s exchange rate needs to be kept broadly stable at a reasonable and equilibrium level, avoiding sustained, one-way depreciation of the yuan.
The country should still continue deepening reforms and comprehensively expand opening-up so as to fuel vitality of the domestic market. That will mean stepped-up efforts in cutting taxes and fees and a continued push for income tax and eldercare reforms for there to be improved satisfaction among Chinese people and ensure growth of residents’ real disposable income in line with GDP growth.