South China Morning Post
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A man walks past a building with an advertisement for Baoshang Bank, in Beijing in September 2018. Management of the bank was taken over by China’s central bank in March to contain its credit risk, authorities said. Photo: Reuters
Opinion
David Brown
David Brown

China can still achieve its 6-6.5 per cent growth target – if it acts quickly to resolve the trade war

  • Beijing needs more overall policy loosening and stimulus measures to meet its goal, and Trump’s overzealous implementation of tariffs is China’s chance to prove itself to be a responsible economic power
David Brown
David Brown
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It’s not getting any easier for China’s growth plans this year with storm clouds on the international front and potential economic squalls brewing at home. Hitting its 6-6.5 per cent GDP target for this year would be a tough ask under normal circumstances. But with a deepening US trade war posing a greater threat to domestic well-being, Beijing needs to pull out all the stops to build much stronger defences around the economy in the coming months. 
It’s not just slower world trade flows harming China’s export sector; there are growing risks that the downturn in global confidence will spill over into weaker consumer spending, hitting business activity even harder. Beijing also needs to ensure orderly operations in the financial system to avoid the risk of a nasty credit squeeze. The recent rescue of Baoshang Bank highlights that Beijing must keep China’s markets flush with funds to ensure stable monetary conditions.

Hitting this year’s growth target is still achievable but it means policymaking must go the extra mile. More wide-ranging easing is needed, with additional tax cuts, extra fiscal spending, more monetary boosts, easier credit conditions and a more relaxed currency stance to bolster growth. Headwinds are getting stronger and Beijing must move fast to buck the trend.

Even though the three-month rolling average for Chinese industrial production growth picked up moderately in April, to 6.4 per cent year on year, business confidence is still showing signs of wear and tear. Last month, the NBS purchasing managers’ index for manufacturing dipped below the 50 boom-bust threshold for the second time this year, a harbinger of weaker growth trends ahead.

Top of the agenda, Beijing needs to find a quick resolution to the trade war with Washington. It’s not a question of yielding to US demands; both sides must reach a quick compromise to rescue the outlook for world trade and global economic confidence. According to data from the CPB Netherlands Bureau for Economic Policy Analysis, world export growth has slowed to a virtual standstill. This must be addressed as soon as possible.
Source: New View Economics
If the slowdown persists, International Monetary Fund forecasts for 3.3 per cent global growth this year, the weakest rate since 2009, could be at serious risk. It’s no wonder world equity markets are rattled. It would be to Beijing’s advantage to show strong leadership in defusing trade war tensions, especially at a moment when Washington appears to be riding roughshod over its trading relationships elsewhere.

On the domestic front, there’s still a lot more Beijing can do to safeguard the outlook for growth. It doesn’t need to open up the floodgates, but a faster flow of domestic stimulus will be necessary to insulate consumers and businesses from any further cooling in aggregate demand.

Monetary expansion and government spending growth are both running below the optimum levels needed to keep the economy turning over at a faster rate. Beijing needs more monetary relaxation and easier fiscal policy to help underpin sustainable, robust growth in the longer term.

On the monetary side, Beijing should pave the way for easing of interest rates and injections of market liquidity in the same way that it has supported the banking system around the Baoshang rescue. Any potential credit squeeze must be avoided at all costs to prevent unnecessary financial market strains.

The reserve ratio requirement for banks could easily come down a further 1 percentage point in the coming months to ensure credit conditions remain relaxed for consumers and businesses.

On the fiscal side, Beijing should keep an open mind about easing tax policy, boosting deficit spending and supporting growth and employment with increased public infrastructure works. With headline consumer inflation currently running below target, Beijing can afford to take a more relaxed view of economic pump-priming without endangering higher prices.

Beijing faces major challenges this year, but 6 to 6.5 per cent growth is still achievable under difficult circumstances. With resourcefulness, good timing and ingenuity, anything can be achieved, including sorting out the trade mess.

David Brown is chief executive of New View Economics

This article appeared in the South China Morning Post print edition as: China can hit its growth target if it resolves trade war quickly
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