China is facing a structural growth slowdown but we are more optimistic than the consensus for the outcome in 2020. At Standard Chartered, we forecast growth of 6.1 per cent, slowing to a still-robust trend of 5.5 per cent through to the mid-2020s.
We see three key reasons to be optimistic about China in 2020: the lagged impact of the shift from deleveraging to releveraging; the boost from increased fiscal stimulus; and the likely improvement in news flow on the US-China trade war.
These supportive factors are likely to be accompanied by the bottoming out of the industrial inventory cycle, domestic producer price inflation and the global electronics cycle.
The unwinding of previous deleveraging measures in 2019, with the authorities shifting back to a more growth-supportive stance, is likely to bear fruit in 2020. There is a close correlation between growth in China’s “total social financing” and GDP growth in the subsequent year. In 2019, the deleveraging of 2018 played a bigger role in dragging down China’s growth than the US-China trade war, in our view.
China’s fiscal policy will remain loose in 2020. We estimate that the adjusted fiscal deficit will be 6.5 per cent of GDP, similar to the 2019 level. The difference is that the emphasis is likely to be more on public investment than on tax cuts, which were the focus in 2019. Tax cuts had a marginal impact, in our view, because of the confidence-sapping effect of the US-China trade war. The impact of fiscal stimulus on the economy is likely to be much greater, as more of it is channelled through direct spending in 2020.
US president Donald Trump’s trade war has changed the long-term relationship between China and the US. Tit-for-tat tariffs are a lose-lose situation. However, we may see a reprieve from these long-term challenges in 2020.
First, Mr Trump has an incentive to keep trade developments on a positive path ahead of the 2020 presidential election, as history shows that it is much more difficult to get re-elected with a weakening economy. Second, China has its own GDP target to meet in 2020, having pledged to double GDP from 2010 levels by then. We expect the tariffs already in place to reduce China’s growth by 0.3 percentage points in 2020 – less of a drag than in 2019.
We do, however, acknowledge the significant longer-term challenges China faces.
The two biggest concerns are debt and demographics, factors that have been in place for many years. We now add a third ‘D’: deglobalisation.
On the debt front, China’s ratio of non-financial-sector debt to GDP has surged 115 percentage points in the past decade, raising concerns about the challenges ahead in servicing this load as growth slows. It is also a key reason why China’s policymakers will be keen to prevent growth from slowing too sharply, as this could trigger a bigger wave of defaults than has already been seen. While some may see the rise in defaults in 2018 and 2019 as a sign of weakness, we believe it has had the positive effect of reversing the moral hazard of the past, when lenders were less focused on borrowers’ creditworthiness because default risk was seen as low.
China’s demographic dividend of the past is turning into an intensifying drag on growth. This is the case across north-east Asia: Taiwan, Hong Kong and South Korea are also likely to see a further decline in trend growth rates in the 2020s due to rapidly ageing populations. Potential mitigating factors include increasing immigration, raising the retirement age, or increasing investment and productivity. The 8m university graduates China is producing per year will play a key role in offsetting the demographic drag.
A strong economy in China means stronger demand for exports around the world, from Germany to Indonesia — something that was noteworthy for its absence in 2019. This is a vital issue for the global economy because China is now its most important driver by far, accounting for over a third of today’s growth. We expect this to remain the case for the foreseeable future.
Assuming no negative shocks, sentiment around the trade war story should improve in 2020. Longer-term structural challenges to global growth from deglobalisation, debt and demographics will persist, however — something to worry more about in 2021 and Beyond.
David Mann is global chief economist at Standard Chartered Bank.
beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.