As China’s economy slows, pressure is increasing on the government to once again resort to the kind of short-term stimulus that did so much to boost growth during previous downturns. If the trade dispute between the US and China intensifies in 2019, resistance could fall.

The Chinese leadership may cut the annual growth target for 2019 in acknowledgment of the economy’s structural shift to a slower pace of growth, but also to recognise short-term headwinds. However, that lowered target may not provide enough breathing space to avoid taking more aggressive steps to stimulate activity, including easing restrictions on the country’s housing markets.

Speculation has grown that the government is preparing to do exactly that after the politburo released a statement talking up the need to counter a slowing economy, while skipping previous mentions of deleveraging and keeping the real estate sector under the cosh. Markets have also been cheered by signals that President Donald Trump may want to put the US-China trade dispute at least on ice when he meets President Xi Jinping on the sidelines of this month’s G20 summit in Argentina.

In response, mainland stocks have risen 7 per cent from this year’s lows, but pervading sentiment remains weak. News that China’s economic growth slowed to 6.5 per cent in the third quarter was taken as a sign of impending doom, even though this is precisely the pace of expansion the government has been targeting the past three years. The economy’s 6.7 per cent growth in the first three quarters of this year means this year’s growth target is probably secured, shifting the focus to the 2019 outlook. 

The 2019 growth target should be agreed next month at the Central Economic Work Conference, a key leadership meeting to outline policy priorities for the coming year, and made public at the start of the annual session of the National People’s Congress in early March.

This growth target has been criticised as a relic of the command economy and blamed for the resource misallocation which has fuelled China’s debt problems. The government may discontinue publishing this annual target after the current five-year plan (2016-20) but until then it will continue to hold a powerful sway over the bureaucracy. 

The government is de-emphasising the growth target in favour of other development yardsticks, but sees it as necessary to fulfil its goal of creating 11m new urban jobs a year and keeping its new surveyed urban unemployment rate below 5.5 per cent. Accordingly, the 2019 target may be reduced to a range of between 6 and 6.5 per cent. 

Even getting the economy to grow 6 per cent may prove challenging, particularly if rapprochement fails and the US continues to raise the stakes in the dispute over Chinese industrial practices. Tariffs have already been imposed on $250bn of Chinese goods imports, and could be extended to all Chinese shipments unless a deal can be reached (the 10 per cent tariffs imposed on $200bn in imports in September are set to rise to 25 per cent at the start of 2019). 

Both our monthly  survey of exporters and official customs data suggest that Chinese shipments have been mostly unaffected so far — China’s economy is slowing on the back of tighter credit resulting from the financial system clean-up — but this may not continue. FT Confidential Research data suggest activity has cooled only marginally in recent months, but the risk of a deeper slowdown becomes greater if a drag from exports compounds already tight credit conditions and  deteriorating consumer confidence

The government has responded so far with tax and fee cuts, lower reserve requirement ratios and targeted relief measures aimed at mitigating the impact on private companies of its de-risking campaign. These easing steps have been relatively minor compared with the heavy-handed responses of 2008, when a Rmb4tn ($578bn) stimulus package was rolled out to counter the global financial crisis, and 2015, when interest rates were slashed and the government took the reins off the housing market. These gave economic growth a boost but also worsened China’s debt picture. 

This deliberately timid approach to stimulus explains why the economy continues to slow. Although policymakers have urged local governments to step up infrastructure investment, this important source of growth continued to slow in September. We have already highlighted the importance of  shadow finance channels in driving infrastructure investment and with that opaque funding activity still in retreat, growth remains weak. 

The housing market has held up far better than expected but our monthly survey of developers has recently shown falling sales and weakening price growth, suggesting that this key economic driver is also faltering. 

If overall credit growth fails to recover and support the economy, then pressure will build for a more forceful response. 

The politburo statement may have fuelled hopes of more aggressive stimulus, but the leadership is not yet ready to resort to the old playbook of pumping in credit at the first sign of trouble. For all the talk of abandoning deleveraging, a People’s Bank of China statement late last week insisted that the “critical battle” to tackle financial risk will continue. This is more than short-term economic policymaking; financial stability, which is threatened by China’s growing debt pile, is considered a national security issue. 

The authorities could probably engineer a sharp rebound in growth if they were to completely abandon monetary and fiscal caution. The fact that they have not done so reflects some commitment to avoiding exacerbating the country’s debt situation. 

But political pressure to give way will build if the economic winds continue to turn, and the government will be hard pressed to hold the line in 2019.

— He Wei, financial researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.