It is not exactly doom and gloom, but dark clouds are beginning to gather over China’s economy. In a stark warning from one of the country’s senior policy advisers, Beijing should start preparing for a downturn in domestic demand, slower export growth and rising trade tensions with the United States.

During the past six months, the economic environment has started to change as the government’s war on debt squeezes major infrastructure projects and corporate borrowing.

This, in turn, will eventually act as a brake and drag down growth in the second half of the year, Wang Yiming, a vice-minister at the Development Research Center of the State Council, an influential think tank, stressed.

To combat the risks, he called on President Xi Jinping’s administration to “keep its macroeconomic policy consistent and press ahead with the structural reform and the deleveraging campaign to stabilize expectations.”

“At the same time, we need to adopt bottom-line thinking and draft all types of contingency plans to take targeted measures [to] appropriately deal with the trade friction [with the US],” he said at a seminar, which was reported by Caixin, the business and financial news organization based in Beijing.

Wang’s remarks are particularly striking since the State Council is recognized as the de-facto cabinet of China’s Communist government.

Last week, it rolled out plans to ease monetary policy which had been tightened to clamp down on debt bubbles forming in state-owned enterprises, local governments and the broader corporate world.

Boost support

Major banks were urged to boost support for “small and micro businesses,” after Sunday’s announcement that the People’s Bank of China would cut the reserve requirement ratios, or RRR, for leading lenders by 50 basis points in early July and accelerate the pace of debt-for-equity swaps.

“The move is an implementation of decisions made at a State Council executive meeting on June 20,” the PBOC, or China’s central bank, stated.

“Funds released by the cut were about 700 billion yuan (US$108 billion), with 200 billion yuan set for easing credit strain for small and micro businesses,” it added in a report by Xinhua, the government’s official news agency.

The decision comes at a time when Beijing is embroiled in a tit-for-tat trade row with Washington with President Donald Trump threatening to impose another round of tariffs worth up to $450 billion on Chinese imports.

At the heart of the dispute are concerns about intellectual property rights in high-tech industries, as well as the ballooning deficit between the US and China.

To put that into perspective, last month the figure swelled to $24.6 billion while between January and March it was $58 billion.

https://www.youtube.com/watch?v=runnAWmFPAc

In 2017, the US trade deficit with China hit a record $375.2 billion, with the world’s second-largest economy importing American goods worth $129.8 billion compared to exports of $507.4 billion, US data showed.

“The fundamental reality is that talk is cheap,” Peter Navarro, the White House trade adviser, told the media in a conference call last week, adding that China “may have underestimated the strong resolve of President Donald J. Trump.”

“If they thought that they could buy us off cheap with a few extra products sold and allow them to continue to steal our intellectual property and crown jewels, that was a miscalculation,” he added.

Apart from a range of tariffs on American imports, China’s response could involve sanctions on US blue-chip brands, such as Boeing, Apple and Nike, according to the state-owned media.

Derek Scissors, a China scholar at the American Enterprise Institute, a Washington think tank, spelled out the reality of the situation when he said that Beijing was running out of US imports to target.

He also stressed that the White House’s broader plan to curtail Xi’s high-tech “Made in China 2025” policy could only be achieved after a long and bitter trade war.

Biggest uncertainty

“As I’ve said from the beginning, China will back off its industrial plans only when US trade measures are large and lasting enough to threaten the influx of foreign exchange,” he said. “Not due to announcements.”

For Wang, a former deputy secretary-general of the National Development and Reform Commission, the country’s main economic-planning agency, the “Sino-US trade dispute is the biggest uncertainty.”

Last month’s data was mixed with exports defying market expectations. But figures released by China’s National Bureau of Statistics revealed that retail sales increased by just 8.5%, a significant drop compared to an increase of 9.4% in April, and the slowest pace of expansion since June 2003, Reuters news agency reported.

Another key driver of economic growth also showed that infrastructure spending slowed to 9.4% in the first five months, compared to a leap of 12.4% between January and April.

“Trade data in May beat market expectations as exporters, fearing [that] additional [US] tariffs [will] be put in place in the second half of the year, rushed to front-load,” Wang said. “That might presage that export growth in the second half of the year could decline.”

Official data also confirmed that fixed-asset investment, another major indicator of domestic demand, was a mere 6.1% between January and May compared to the same period in 2017.

Again, this was the slowest growth since figures were first released in February 1998. “[This was] very worrying,” Wang pointed out, adding that it could be the start of a long-term trend.

If it is, his message to ‘prepare for the worst’ is bound to have Beijing’s economic policy-makers burning the midnight oil in the months ahead.

China Data
Graphic: National Bureau of Statistics of China