China’s Economic Slowdown

China’s economy keeps flashing warning signs that it is losing steam—but, unlike past episodes, Beijing isn’t likely to stoke the fires to boost growth. The world’s second-largest economy, battered by a trade war with the U.S., is experiencing a slowdown that is more broad-based than any it has faced since the global financial crisis. This time, the problems aren’t just cooling global growth, but also more sluggish domestic activity, reflecting both anemic production and demand.

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This has ignited hopes for a forceful economic stimulus package from Beijing, as the world has relied on during previous periods of weakness over the past decade. But this time, it appears such hopes are in vain. China’s central bank has decided to stand pat on monetary policy for now, even though other major central banks have eased recently amid the darkening global economic outlook. On fiscal policy, Beijing isn’t signaling more tax cuts or bigger government spending programs any time soon. Behind the reluctance to stimulate: The leadership’s judgment that a cooling economy is inevitable, and part of its plan to crack down on rising debt levels.

Central bankers also believe that pumping large sums of money into the economy would be of limited or short-lived effect. For now, the pace of the slowdown appears to be acceptable to policy makers, said Lu Zhengwei, an economist with China-based lender Industrial Bank. The International Monetary Fund forecast in July that China’s economy will grow 6.2% this year, down from 6.6% last year—much faster than other major economies but below the double-digit growth rates before the global financial crisis. The IMF releases updated economic forecasts this week. “The core policy stance is still to cushion a slowdown not to stimulate growth,” said Mr. Lu.


Despite a broad cooling in the economy, there have been few signs of massive layoffs like those during the financial crisis. That is partly due to a shrinking working-age population and partly because a growing service sector is absorbing more workers from factory floors, economists say. President Xi Jinping, who came to power in 2012, has also publicly aligned himself with a yearslong campaign to curb rising debt, making any sudden turn to stimulus politically difficult.

An article published by the People’s Daily, the official Communist Party mouthpiece, in May 2016, described slower economic growth as a natural stage of development that could last several years. “When some economic indicators pick up, we shouldn’t be exuberant; when some economic indicators go down, we shouldn’t panic either,” an unnamed senior government official told the paper. But that was before a sharp economic slowdown late last year and escalations in trade tensions with the U.S., which prompted Chinese authorities to begin 2019 with a burst of stimulus measures, including tax cuts, pledges to lend to small companies and ordering municipal governments to fund infrastructure construction.

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Since then, however, the authorities seemed to have shifted from seeking a quick fix to focusing on putting the Chinese economy on a healthier long-term footing. At a Politburo meeting in late July, policy makers pledged not to stimulate the property market—a favored lever in past slowdowns—for fear of fueling speculation. The central bank in August moved to lower borrowing costs for businesses through a new reference lending rate but stressed new mortgage rates cannot be lower than the new benchmark. “It marks a long-term change in China’s policy making as they are trying to contain asset bubbles,” said Chaoping Zhu, an economist J.P. Morgan Asset Management.

Policy makers, he said, are seeking to buy time to restructure the economy into one that is driven more by technology and consumption, and less by property and investment. If the economic chill worsens, of course, Beijing may have to ease some controls on the property market, but would likely leave most in place to avoid spurring household debt levels higher, Mr. Zhu said.

A rapid pickup in borrowing by local governments and banks this year has brought China’s total debt to over $40 trillion, nearly 306% of its gross domestic product and about 16% of all global debt, according to the Institute of International Finance, an association of global financial firms. By comparison, total U.S. debt is nearing $70 trillion, or 327.9% of GDP.

Not all news about the Chinese economy has been negative. Official and private gauges of factory activity, for instance, picked up last month. That probably won’t change a cooling trend, as falling prices for factory goods erode companies’ profits, weakening their ability to repay debt and threatening employment, economists have warned. Beijing will probably need to step up efforts to stabilize growth but “measured easing, not aggressive easing is likely,” wrote Bo Zhuang, chief China economist for research firm TS Lombard in a note to clients.

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Mr. Xi presided over a grandiose military parade celebrating the 70th anniversary of Communist Party’s rule early this month, vowing no force could impede China’s forward march. His “success will be determined neither by responses to the trade war nor by Hong Kong but by management of financial risks,” wrote TS Lombard policy analyst Eleanor Olcott. “To achieve this end, Beijing is accepting slower growth,” she said in the same note.





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