With the US-China trade war likely to drag on, are Beijing’s economic growth targets still valid? Maybe not

When China’s economic output slowed to the critical level of 6 per cent in the third quarter of the year, policymakers – puzzlingly – seemed to attach less weight to the figure than markets expected. Also, as the Post reported recently, more than one-third of China’s provinces have so far fallen short of this year’s growth targets. Historically poorer regions took the hardest hit, official data showed. For example, the three northeastern provinces – Liaoning, Heilongjiang and Jilin – posted growth rates of 5.7 per cent, 4.3 per cent and 1.8 per cent in the first three quarters, lower than the respective targets of 6 to 6.5 per cent, 5 per cent and 5 to 6 per cent. Certainly, one can argue that the 6 per cent growth rate is no surprise, given the consensus on an economic slowdown in China. Chinese policymakers have also acknowledged on several occasions that the economy is under pressure. However, if we extrapolate the data, we are likely to witness a sub-6 per cent growth rate soon, which is seen by many as Chinese policymakers’ lower limit. Why is 6 per cent a critical point? In 2012, China set itself an ambitious goal of doubling gross domestic product by 2020, from 2010 levels, as part of a commitment to building a “moderately prosperous society”. This was also seen as a signal of China’s quest to emerge as a superpower. However, a simple calculation suggests that if growth dips below 6 per cent in 2020, there is a risk of China falling short of this target. While the Chinese authorities have watered down the target in recent years, markets tend to believe that certain levels of growth have to be maintained as they matter in the context of China’s long-term strategy. So, then, the question is: are these levels still valid? The secret to China’s economic miracle: unbalanced growth To be honest, the answer is unclear for now. However, with the rapid evolution of China in recent years, markets may need to revise the China story accordingly. The trade war with the United States is a clear game changer that has significantly damped China’s ability to react. With Washington and Beijing only looking at a “phase one” deal after more than a year, the trade spat looks likely to drag on, and Chinese policymakers have to take careful action and reserve firepower for the long haul. This explains why policymakers have exercised restraint in policy easing over the past few quarters, to the disappointment of investors, particularly bond traders. Most recently, the People’s Bank of China kept its new benchmark lending rate unchanged at 4.2 per cent on October 20, even though a cut of at least 5 basis points was widely expected. After all, markets were just getting used to China’s loosening of monetary policy. However, policymakers’ hesitation also reflects doubts about the effectiveness of traditional stimulus measures. China’s debt problem is one obvious concern. But the trade war has also made the monetary policy transmission mechanism less effective. For instance, companies are finding it hard to spell out concrete long-term plans, given all the trade uncertainties. And this is probably morphing into a global phenomenon, as manufacturing investment melts across major economies. How China should best respond to economic split with the US Everyone is looking for alternatives. A workable solution for Chinese companies, for example, is to shift some production to countries in the Association of Southeast Asian Nations (Asean) such as Vietnam. But owing to a lack of trained workers and a shortage of infrastructure, the diversification of supply chains is still at an early, experimental stage. Needless to say, Asean countries could become the next targets of the trade war if they run widening trade surpluses with the US. So companies have to worry about the risks in their search for alternatives. Hence, without a fundamental resolution to the US-China trade dispute, a cautious mood should continue to grip the real economy, and drag down overall growth prospects. A further slowdown in the Chinese economy looks inevitable. Therefore, 6 per cent is unlikely to be the floor for China’s growth rate from a medium- to long-term perspective. Unfortunately, any aggressive policy easing is unlikely to significantly rebuild momentum, and could instead create asset bubbles, especially in the property market. Essentially, markets need to accept that a new China narrative is taking shape: Beijing will seek an equilibrium between growth, financial stability and external dynamics. Unlike in the past decade when the external environment was much more favourable, China will now have to make a greater effort to overcome global challenges. Can China draw the right lessons from Japan’s trade war with US? From this perspective, the growth target will be much less important, and marginally missing it might become the new norm. By this logic, it shouldn’t be surprising if China scraps the official target at some point. Like it or not, this is the price it might have to pay to play a long game in the trade conflict. Hao Zhou is senior emerging markets economist at Commerzbank