Chinese data from the National Bureau of Statistics (NBS) are often criticised as unreliable and politically skewed. I have a more balanced view: NBS officers do their best to extract information from an outdated statistical system, still shaped by soviet concepts such as quantities, rather than values and volumes, and which is unfit to gauge an economy now dominated by services. Perhaps because of the poor quality of their data, statisticians tend to iron out cyclical gyrations, and thus to underreport both downturns and upturns. And when it comes to nowcasting exercises, such as this preliminary GDP estimate, they presumably adopt a very conservative stance. Even so, financial markets and private analysts are not fooled and they have already priced in a GDP stagnation, if not a contraction, in the fourth quarter, with a possible spillover in the first months of 2019.
What has sparked this downturn? The most obvious cause is the impact of Trump’s tariff war and US sanctions, or at least their threat, against intellectual property acquisitions by Chinese technology firms. The latter may indeed have started to disrupt Asian supply chains in this hot and strategic sector. But there are also two important domestic factors.
- First, policymakers have been continuously switching from credit expansion – leading to excessive leverage — to credit restriction, since the massive stimulus that prevented the Chinese economy to collapse in 2009. Given that credit expansion is opaque and opens the door to corruption – because of state-owned banks often linked to local party officials, or of peer-to-peer lending via Internet platforms —, credit restrictions engineered by the central bank (People’s Bank of China, PBC) may be amplified by political factors, such as the official pledge to fight corruption. This could explain what happened at the end of 2018, after a significant and politically unwelcome increase in corporate leverage at the beginning of the year.
- Second, a car sales tax rebate ended in early 2018, which led consumers to frontload their purchases at the end of 2017, causing a sharp contraction afterwards. Politicians seem to have been caught off-guard, and an official advisory body has recently alluded to the idea of another tax rebate in early 2019. Ironically, this may depress car sales further: rational consumers will postpone their purchases until the tax rebate is enacted. But of course, a powerful rebound would follow suit, to the great relief of officials. The Chinese car market is far from being saturated, and the long-term trend of new car sales should recover, although at a much slower rate than it did 10 years ago. Car production had almost tripled from 2009 to 2011. That was then.
The most reliable evidence of a broad slowdown is the PBC’s reaction, as it has already opened the liquidity tap by reducing the reserve ratio commercial banks must abide with by one point, thus injecting 570 billion yuan in the economy. Even combined with a hypothetical tax cut on car sales, this won’t be enough to kickstart the economy: the liquidity injection only amounts to 0.7% of GDP. Although China may offer enough concessions to fend off another American tariff hike, there is a distinct possibility that trade negotiations with the US fail. If this were to happen, China would have no other choice but to resort to a more significant monetary and fiscal stimulus. It is also possible that the PBC will be instructed to be less stringent on credit quality and temporarily suspend the deleveraging process. Once again, a policy-driven credit cycle would challenge the long-term goals advocated by Xi Jinping, such as financial stability. Japan has already been there, and Chinese leaders remember how it ended.
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