RaboResearch - Economic Research

China: Stimulus prevents further slowdown in growth

Economic Comment

  • China’s official GDP print for the second quarter of 2019 came in at 6.2%
  • Net trade contribution offset weak domestic demand, similar to the previous quarter
  • Fiscal and monetary stimuli have been used to slow the pace of the cool down in the Chinese economy
  • The question is not if, but when (trade) tensions with the United States will flare up again

Lower GDP growth in line with expectations

Figure 1: Not so much change in lower official GDP print
Figure 1: Not so much change in lower official GDP printSource: NBS, Macrobond.
Note: these year-on-year figures represent quarterly real GDP growth and contributions

According to official figures released on Monday July 15, the Chinese economy grew by 6.2% in the second quarter of 2019 compared to the same quarter last year. As a result, GDP growth was 0.2ppts lower compared to the previous two quarters, which is in line with our expectations of a gradual slowdown in economic growth. The breakdown of GDP expenditure components shows similarities with the previous quarter (Figure 1). Once again, the growth contribution from both consumption and investment weakened, while net trade made a relatively large contribution to GDP growth. The cause was not so much export growth, which fell by 0.9% y/y in nominal USD terms in Q2, but even weaker imports. The latter even fell by 3.9%, clearly confirming and pointing to weakness in domestic demand.

Domestic weakness clearly visible in first two months

Previously, we anticipated increasing domestic weakness as a result of slowing first quarter imports. Since data from April and May especially were disappointing, we already expected further domestic weakness based on decelerations in high-frequency indicators, such as retail trade (especially in April), and private fixed asset investments and industrial production in these months (Table 1).

Table 1: Weak domestic demand figures in second quarter
Table 1: Weak domestic demand figures in second quarterSource: NBS, Macrobond.
Note: all data for Table 1 (excl. retail sales) are in nominal terms. There is no price deflator available to calculate figures in volume terms.
Figure 2: Higher food prices mask domestic weakness
Figure 2: Higher food prices mask domestic weaknessSource: NBS, Macrobond

The weakness in terms of domestic demand is also visible in underlying consumer and producer price developments. Although headline consumer price inflation (CPI) remained stable in June (2.7% y/y), overall consumer prices surged recently due to the spike in food price inflation caused by higher pork prices related to African swine fever. This is clearly visible if one strips out food price inflation (Figure 2). In addition, Chinese producer prices (PPI) are moving towards deflationary territory, which also underlines weakness in domestic demand.

On the back of more government stimulus, June headed towards a slight recovery on several fronts, similar to the first quarter, when March showed a recovery for several domestic indicators as well (Table 1). In particular industrial production from state-owned enterprises (SOEs) played a key role, as the 6.2% increase in June was the highest reading in a year. In addition fixed asset investments from the public sector were on average much higher in Q2 compared to previous quarters. The key question is whether there is already a floor under the deceleration in domestic growth, or whether more government stimulus is needed to avert a further, more significant slowdown.


Looking forward, pace of growth in retail sales is expected to continue on the back of government tax policies, such as income tax and VAT cuts. But as we have argued before, the additional effect on the real economy also depends on consumers’ willingness to prop up spending. If there is more uncertainty on the labor market or the economy in general, consumers might be much less willing to spend higher disposable income. Other fiscal and monetary stimulus measures are more likely to be aimed at avoiding a significant slowdown in growth and would therefore have a balanced and targeted focus. As such, more credit stimulus to (smaller) private firms and the government is likely to preferring offering more infrastructure investments than making higher (credit) allocations to public enterprises and investments in property sectors.

With official growth figures of 6.4% y/y in Q1 and 6.2% y/y in Q2, policymakers are well on the way to achieving their 2019 GDP growth target. All in all, we expect overall official GDP growth to come in at 6.2% this year, before slowing moderately to 5.9% in 2020. This lower growth is based on the assumption of further gradual domestic weakening and deteriorating external activity. As such we should keep a close eye not just on domestic weakness but on the challenging external environment as well. For instance, an escalation of the US-China trade war would lead to a downward revision of our economic forecasts, as we pointed out in our most recent global economic quarterly outlook.

External environment remains challenging

Figure 3: Ongoing weakness on the external front
Figure 3: Ongoing weakness on the external frontSource: General Administration of Customs, Macrobond.
Note: these figures are in nominal terms due to lagged availability of price deflators. As such, any export price compensation in terms of subsidies is not included here.

Both exports and imports have continued to show the weakness that started early this year. Several factors are at play here. Firstly, growth in global trade volumes is waning, which also affects China’s exports, while lower domestic activity also results in lower demand for foreign goods and services. Secondly, there is a discrepancy between China’s trade vis-à-vis the US compared to the rest of the world (Figure 3). Notwithstanding a small rebound in March and April, trade figures again moved into negative territory in May and June, which especially holds for US-China trade figures. China’s nominal y/y exports in USD to the world were flat in the first half of 2019, but exports to US shores dropped by almost 9%. For imports, this skewed pattern was even more severe: Chinese nominal imports from the world dropped on average by 4.4%, while imports from the US dropped by almost 30% in the same period.

After US president Trump tweeted on 5 May that the US would raise the 10 percent import tariffs previously imposed on USD 200bn of imports from China to 25 percent, the higher US tariffs took effect on 10 May. In retaliation, on 1 June China increased tariffs (by between 10 and 25 percent) on USD 60bn of imports from the US. The increase in these tariffs therefore appears to have had an additional negative impact on trade figures in the subsequent period.

China – United States tensions: a stable-unstable equilibrium

Similar to the situation after the previous G20 that took place at the end of 2018 in Buenos Aires, the G20 in Osaka on June 29, 2019 laid the ground for a ‘trade war truce’ between the US and China. After the meeting, the US decided not to announce any new protectionist measures, making room for further negotiations. The result from the G20 meeting and the current stance is in line with our baseline scenario for the time being. However, we do foresee an escalation as a realistic scenario, simply because negotiations between the two sides go far beyond trade issues. As such, we are currently in a stable-unstable equilibrium. In our base case, the current protectionist measures will remain in place, but a further escalation seems unavoidable. Therefore, in our view the question is not if tensions will flare up again, but when. One important assumption in such an escalation scenario is that both countries will put additional tariffs on all their bilateral imports. In case of a full escalation, China’s GDP losses could end up being as high as 5.7ppts in the long-term. Other important assumptions related to this escalation scenario are related to a significant depreciation of the Chinese currency (CNY) against the US dollar and negative productivity effects for China.

In the short run, there are two potential triggers that could lead to further escalation, taking account of the recent G20 outcome. One relates to Huawei and the contradictory announcement from the US to keep on selling components (excl. components related to national security); the other to China’s pledge to buy more agricultural products from the US. If one of these triggers is activated (e.g. no selling of components to Huawei by the US and/or no agricultural purchases by China), the US could up the ante by installing higher tariffs (most likely 10%) on the remaining imports from China.

Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO

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