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china's impact on world economic growth

China: from threat to ballast

April 2019

Patrick Zweifel, Chief Economist

Effective government stimulus has transformed China from a threat to the world’s economic health to a stabilising force. 

The US is gripped by fears of a recession, while Germany’s manufacturing sector continues to contract. As clouds gather over the global economy, however, one bright spot stands out – China. In just a few months, the Asian powerhouse has transformed from a major threat to world economic stability to its saving grace. And, unusually, the shift is an indirect result of a development that had the potential to cause significant harm to China – US trade sanctions.

Since the start of 2018, the Trump administration has slapped sanction on Chinese goods worth a total of USD250 billion. According to our calculations, that equates to a 0.3 per cent hit to China’s gross domestic product (GDP), potentially rising up to 1 per cent if the trade war escalates.

Fig. 1 official boost
China’s economic and policy measures, 2018-9
China stimulus measures
Source: Pictet Asset Management, SCMP. JP Morgan, UBS
Crucially, however, Chinese authorities have reacted in a prudent and timely manner. The sanctions have prompted Beijing to speed up reforms and unveil stimulus measures, including tax cuts, infrastructure spending and monetary easing, worth some RMB2.8 trillion (see chart). Our analysis shows that around of third of that should filter through into economic growth – equivalent to an annual boost of around 0.3-0.5 per cent per year over the next two years.
The proactive stance is paying off, which bodes well for Chinese assets, as well as for emerging markets more broadly. We have already seen an inflection in credit growth, industrial production and fixed asset investments (Fig. 2). The rebound in infrastructure spending has been particularly strong, funded by special issuance of local government bonds.
Fig. 2 starting to improve
China investment and industrial production growth, 6m/6m %, annualised
China economic recovery chart
Source: Pictet Asset Management, CEIC, Thomson Reuters Datasteam. Data covering period 01.02.2017-01.02.2019.

Crucially, the recent National People’s Congress (NPC) meeting acknowledged this structural slowdown by revising down its own growth target to 6.0-6.5 per cent from 6.5 percent. The range is in line both with our own forecast for this year and with market consensus.

This shows that they recognise the structural trend of gradually slowing growth as the economy deleverages, which in turn gives us some confidence that they will not overstimulate the economy with counter-cyclical measures.

Given the size of the Chinese economy, the fact that it is now on a more stable footing offers a strong counterbalance to the slowdown in US and euro zone. China contributed over a third of the world’s economic growth in 2018, and this year we expect that proportion to be even greater. The Asian powerhouse is back; that should be good news for emerging market assets in general, and for Chinese ones in particular.