2019 is a 'crucial year' for China's economy | The Daily Star
12:00 AM, March 22, 2019 / LAST MODIFIED: 02:51 PM, March 22, 2019

2019 is a 'crucial year' for China's economy

According to Premier Li Keqiang, 2019 is a “crucial year” for China. One reason for that possibly is the preparations currently afoot to celebrate the 70th anniversary of the founding of the People's Republic on October 1. More importantly, China has been struggling to accelerate economic growth, boost employment, and revitalise its “Made in China 2025” initiative. Premier Li, the number-two man in the regime, was quite forthcoming about the serious challenges that China's economy has been facing in the last eight years. He acknowledged that GDP growth rates have slowed down from the previous decade, and business morale is down.

One major contributing factor in recent months is the US-China trade war which has only exacerbated its economic anxieties and had an adverse effect on jobs. “We must be fully prepared for a tough struggle”, Li added, in a speech delivered on March 5 at the opening session of the 13th National People's Congress, China's legislature body. Another powerful player in China, the Politburo of the Communist Party ranked “stabilising employment” as the first and most important task to tackle growing joblessness.

China and its economy appear to frequently swing in and out of international news headlines. One side-effect of the recent global focus on US President Donald Trump and his policies, tweets, and sometimes erratic behaviour has been that people are missing out on many other impactful events happening all over the world. The Brexit drama in Europe, the defeat of ISIS in Syria, Africa's socio-economic struggles, China's uncertain economic future and its effect on its trading partners, and the unclear fate of the global climate agreement reached in Paris are but a few of the long-lasting changes that do not always hit the news cycle but have far-reaching ramifications for the rest of us.

So, what have we missed out on China lately? A significant set of events that went out of the limelight is China's economic reform, policy realignment, and efforts to find a soft-landing from its high-flying days. Since the last financial crisis, it has been apparent that China's economy is going through a rough patch. Since 2010, China's GDP growth rate has almost halved in less than 10 years.

Undoubtedly, China is still the world's second largest economy and has been the engine of growth for the global economy during the last quarter of a century. Data released by its National Bureau of Statistics (NBS) show that in the past year, China's economy made up around 15 percent of the world's total, and contributed about 30 percent to global economic growth, cementing the country's position in the world economy. In sharp contrast to that, the growth rate for 2018 was only 6.5 percent, the lowest in 28 years. What accounts for this deceleration in economic activities? A year ago, right after Chinese President XI Jinping was crowned as the “President for Life” there was a falling out between US President Trump and Xi. However, Trump was hardly the trigger for the turbulence in China's economic and political domain.

President Xi had an ambitious goal to make China the world's most powerful economy, and in 2015 announced the “Made in China 2025” strategic plan. China's ruling party did not see much value in pursuing the western model which relies on democratisation in the political arena, investment in technology and education, and channelling the innovativeness of the private sector to boost it into the 20th century. The Communist Party and its leadership saw another option, known as the “Second-mover Advantage”. It refers to the advantage a nation receives from following others or mimicking an existing model.

China's overall success in the earlier days of reform initiated by Deng Xiaoping can be attributed to its “vast, cheap labour supply”, its “attractive internal market for foreign investment”, strong government support, and its access to the American market which provided a perfect “spendthrift counterpart” for China's exports and a high savings rate. The favourable conditions, in parallel with a strong government, a large body of state-owned enterprises, and a smart industrial policy transformed its economy. While China's economy grew at a phenomenal rate of 10 percent from the 1980s, based on exports and high savings, it also sowed the seeds of its latest woes.

In 2018, China's economic growth was the lowest since 1990 and annual auto sales fell for the first time since 1990, a clear sign of economic trouble. Some factories let workers off for this year's Lunar New Year holiday two months early. In January 2019, Apple cut its quarterly sales forecast blaming lower than expected iPhone sales in China. Trade data published in mid-January shows an “unexpected contraction in imports adding to concerns about slackening demand.” Investors say that Chinese consumers are spending but in more discerning ways with “less emphasis on luxury and big-ticket items.” Alibaba, China's largest e-commerce business, recently announced that its earnings growth had fallen. “Its revenue was slightly below analysts' expectations, growing by 41 percent, its slowest pace since early 2016, reflecting both the sheer size of the company and widening troubles in the Chinese economy.”

What does 2019 hold for China? Some economists believe growth will improve by the middle of the year. Towards the end of January, China's government undertook measures to boost consumption, including new ways to bolster the country's auto sales. The language, though, was somewhat vague, according to analysts: “Local governments with adequate resources” will be able to offer subsidies to rural car buyers trading in their old vehicles. Economy's demand might be bolstered by additional income from tax cuts, tariffs and pension contributions.

Stefan Hofer, chief investment strategist at LGT Bank Asia, expects growth to stay above 6 percent this year and the next aided by tax cuts and easier monetary policy. There are indications that credit demand is growing and improving and business confidence is growing and these are positive signs of economic recovery.

Nonetheless, exports in February were down by 20 percent. Broader economic outlook is still clouded by the shadow-banking crackdown and the trade conflict with the US. China Beige Book recently confirmed that there are still weaknesses in auto, restaurants, and luxury goods sectors. “China's ability to kickstart the economy is weak. The most disappointing aspect of China's reforms is the underdevelopment of the rule of law, which leads to institutionalised state opportunism, self-dealing of the ruling class, and rampant corruption.” Countercyclical policy measures might cushion the speed of growth deceleration but would be unlikely to reverse the downward trend in the economy,” said BNP Paribas' economist Jacqueline Rong last November. “We expect a progressive decline in China's growth rate.”

For many, the evidence of a slowdown in the Chinese economy and the willingness of the top brass in the Communist Party to acknowledge it are both positive signs. It confirms that existing reforms are working, and more reforms are in the works. Latest indicators such as growing credit demand and improving business confidence show that economic recovery is gathering momentum thanks to a mix of supportive policies. And the US-China trade talks are finally nearing an end with China promising to import an extra USD 1.35 trillion from the US.

With the US trade deal in his pocket, and the Party solidly behind him, Xi can confidently look forward to the forthcoming celebrations in October.

Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.

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