BOFIT Viikkokatsaus / BOFIT Weekly Review 2018/31
Official figures show China's 12-month GDP growth slowed marginally in the second quarter to 6.7 %. Readings of the two major purchasing manager indices also suggested a slight slowdown. In contrast, the eagerness of Chinese decision-makers to increase fiscal and monetary policy stimulus suggests a more serious deterioration in the growth outlook.
In late July, the government promised large tax cuts (estimated at 1.4 % of GDP) to businesses and similar scale spending increases for local-government infrastructure projects. The monetary policy easing in July granted banks access to the central bank's medium-term lending facility (MLF) on the condition that they use the money to buy corporate bonds of their clients. Bloomberg reports that multiple sources have confirmed higher quotas for bank corporate loans and a relaxing of rules related to corporate lending.
The flaring of trade tensions reminiscent of a trade war with the US has been an important driver of concerns over lower economic growth. China's long-term growth concerns, however, relate to the country's own problems. Besides the complex structural problems (part of which are also responsible for the current trade disputes), over-indebtedness is a big issue.
Stimulus measures at this point only kick the structural reform can down the road and increases the debt burden on the economy. Politicians, nevertheless, are lured by the hope that stimulus will help them meet their official growth targets, the achievement of which was reiterated in the final communique from the Communist Party's politburo meeting at the end of July. Official figures that suggest stable, high growth and a policy stance framed around providing stimulus are hard to reconcile, especially in light of the already over-leveraged economy.