A Fragile Private Sector Recovery

Private sector competitiveness is critical to China’s long-term economic health. According to the National Development and Reform Commission (NDRC), private firms drove 60% of fixed asset investment, 75% of technological innovation, and 90% of new employment since 2012. But last year the private sector shrank, and state-owned enterprises (SOEs) grew as a proportion of China’s economy for the first time in two decades. This was seen by private investors – within and outside of China – as an indication of the government’s preference for state firms and as a harrowing sign for the country’s economic trajectory.

Since late 2018 senior Chinese leaders promised new support for the private sector, including more lending and tax cuts, along with pledges of “competitive neutrality,” or equal treatment between private and state firms. Are these efforts working? Recent data suggest that while private sector financial performance is improving marginally in recent months, this is primarily because of easier credit conditions, rather than fundamental improvements in the competitive environment that would drive stronger private sector profitability.

Posted April 10, 2019
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China’s Procyclical Consumption Outlook

One of the most surprising developments within China’s economy in 2018 was the slowdown in household consumption, coincident with a broader decline in industrial output. China’s consumption activity has tended to move in line with the economy as a whole in recent years. This counterintuitive finding suggests there is minimal separation between consumer spending within China’s “new economy” and cycles in traditional heavy industrial sectors, particularly in their effects on income and employment. In terms of the outlook for consumption:
Weakness in consumer spending from 2018 has extended early this year. Chinese New Year sales growth slowed, and output of some categories of consumer goods are still leading the broader downturn in industrial activity.

Policy support for the broader economy may benefit consumers early in 2019. As consumption growth appears pro-cyclical, limited improvements in activity and credit conditions may carry over to household spending starting around Q2 2019.

Longer-term structural changes will pressure consumer spending. As urbanization slows and demographic changes bite, urban consumers are increasingly burdened by mortgage debt and rising health care costs. Rural consumption growth may rise but will be insufficient to offset the slowdown in cities.

Posted February 27, 2019
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Fiscal Policy Takes Center Stage in 2019

China’s leadership will hold a critical meeting in December, the Central Economic Work Conference, to establish economic policy priorities for next year. Our expectations for the meeting include:

Fiscal policy will be more supportive next year. Monetary policy played a larger role in 2018, but a larger fiscal deficit and quasi-fiscal spending will be used to stabilize growth in 2019. Policy transmission is still hampered by the local government debt burden.

Policy toward the property sector will be more constructive, but headwinds persist. The property sector will continue to drag on growth as developers’ financing is under pressure and construction slows.

Trade tension to keep monetary easing intact. External pressure on China’s economy will grow in 2019 compared to this year, even if the outcome of the US-China bilateral meeting at the G20 is modestly constructive. Monetary easing will continue as Beijing attempts to boost lending to private firms.

Posted December 5, 2018
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