China won't unleash 'runaway stimulus' to revive the economy

China's economic slowdown is causing alarm around the world, but President Xi Jinping's government may be wi...

Posted: Jan 15, 2019 1:13 PM
Updated: Jan 15, 2019 1:13 PM

China's economic slowdown is causing alarm around the world, but President Xi Jinping's government may be willing to go only so far to limit the damage.

Beijing on Tuesday announced 1.3 trillion yuan ($193 billion) worth of new measures designed to stimulate the economy, including tax cuts for small businesses and reduced tariffs. It's the latest in a flurry of government efforts to prop up growth in recent months, such as boosting infrastructure spending and looser monetary policy.

Asia

China

Continents and regions

East Asia

Business, economy and trade

Economy and economic indicators

Economic conditions

Economic decline

Economic policy

Monetary policy

Government and public administration

Public finance

Taxes and taxation

Economic crisis

Beijing

Banking, finance and investments

Currencies

Money, banknotes and coins

Weakening growth in the world's second biggest economy combined with the trade war with the United States has spooked investors and prompted warnings from top companies like Apple (AAPL).

Experts question whether Beijing's measures will be enough to stimulate the economy.

"It'll take a lot more to pull China out of what feels like a recession," said Scott Kennedy, an expert on the Chinese economy at the Center for Strategic and International Studies in Washington.

The country's official growth rate is expected to be around 6.5% for 2018, the weakest in nearly three decades, and to drop closer to 6% this year. But many analysts are skeptical about the accuracy of the government figures and say growth may be significantly lower in reality.

Plenty of signs are flashing red. In December, Chinese exports suffered a surprise decline, while annual car sales in 2018 fell for the first time in around 20 years.

Preventing growth collapsing

Part of the problem is that China's easing measures could be hitting the wrong targets. The central bank has gradually cut the amount of cash commercial banks are required to hold as reserves. That should mean banks have more money to lend to businesses, encouraging investment and economic activity.

"The problem is that [this] money doesn't flow into the real economy," Larry Hu, chief China economist at investment bank Macquarie, said in a note to clients this month.

Banks are instead parking the cash in Chinese government bonds or lending to inefficient, state-run businesses, which often use it to rollover their existing debts. This money would be more effective if it was directed to private businesses, according to Hu.

Rather than fueling a rebound, the central bank's recent cuts may only "prevent growth from truly collapsing," said Christoper Balding, a China expert at the Fulbright University Vietnam in Ho Chi Minh City.

More stimulus incoming

Burgeoning evidence that the slowdown is getting worse makes more stimulus measures all but certain.

In recent months, Beijing has moved ahead with plans for billions of dollars of new railway projects and tax cuts for small businesses. Officials also say they are preparing measures to help the struggling auto industry.

But Beijing's efforts won't kick in straight away.

"It will take several more months of easing before the economy and stock market begin to feel the benefit," said Chen Long, an analyst at research firm Gavekal.

Chinese stocks had a miserable 2018, suffering from the slowdown and the trade hostilities with the United States. And until stimulus measures start having a real effect, "market momentum is going to deteriorate further," Long said.

Lessons from the 'big bang'

China's plans this time around are small change compared with the "big bang" stimulus it launched in response to the global financial crisis. In 2008 and 2009, Beijing injected nearly $600 billion into its economy to fight off the effects of the global slowdown.

"China still has a lot of ammunition" in terms of the moves it can make, said Jeff Ng, chief Asia economist at research firm Continuum Economics. But he warned that "there are side effects."

One concern is the huge amount of debt in the country's financial system. The Chinese economy expanded rapidly in the years after the global financial crisis thanks to repeated debt binges. But that left it nursing a hangover.

President Xi and other top officials have in recent years pressed China's financial system to cut down on riskier lending, a campaign often referred to as "deleveraging". But as the economy has weakened, the priority has shifted.

"In view of the extraordinary difficulty that China is facing amid trade tensions, China is willing to halt its deleveraging efforts in order to defend growth," said Janet Mui, an economist at investment firm Cazenove Capital in London.

Losses in the stock market have increased the pressure on authorities to keep adding stimulus, she said.

The risks of 'runaway stimulus'

But too much stimulus runs the risk of adding to China's already worrisome debt levels.

It could also pile pressure on the country's currency, which despite a recent rally is still down significantly against the dollar over the past year. That could lead to renewed fears of investors moving huge sums of money out of China and increase trade tensions with the Trump administration, which has repeatedly accused Beijing of weakening its currency to boost Chinese exporters.

"Chinese policymakers are wary of broad-based stimulus in high dosages," said Darren Tay, a country risk analyst at research firm Fitch Solutions. "Loosening monetary policy too quickly could indeed cause the yuan to weaken quickly."

Repeated injections of cash into the economy may also add fuel to China's red-hot property market and damagingly distort its industrial sector.

In December, prices of Chinese industrial and manufactured goods rose at a much slower pace than expected. Some analysts suggest this may mean China is again starting to suffer from overcapacity — production that exceeds demand and lowers global prices.

"We believe Beijing is painfully aware of these risks, which is why we do not expect runaway stimulus this time around," said Tay.

Minnesota Coronavirus Cases

Data is updated nightly.

Cases: 448268

Reported Deaths: 6013
CountyCasesDeaths
Hennepin931011480
Ramsey40016739
Dakota33072340
Anoka30999364
Washington20164228
Stearns17871187
St. Louis13690241
Scott1195496
Wright11614104
Olmsted1048475
Sherburne821365
Carver694836
Clay653280
Rice606868
Kandiyohi554371
Blue Earth541033
Crow Wing482774
Otter Tail457167
Chisago452732
Benton420186
Winona389646
Douglas374166
Nobles370846
Mower365529
Goodhue347958
Polk328658
McLeod325345
Morrison311744
Beltrami310347
Lyon302236
Becker284939
Itasca284543
Isanti282841
Carlton280043
Steele27379
Pine266713
Freeborn245321
Todd231730
Nicollet224636
Brown215134
Mille Lacs214246
Le Sueur210015
Cass207623
Meeker199733
Waseca189316
Wabasha17083
Martin170026
Roseau165416
Hubbard149338
Redwood139727
Renville137539
Houston135913
Dodge13474
Chippewa131332
Cottonwood127218
Fillmore12355
Wadena120116
Rock110212
Sibley10857
Aitkin108433
Watonwan10668
Faribault105916
Pennington99215
Kanabec97818
Pipestone94423
Yellow Medicine93714
Murray8815
Jackson85610
Swift83418
Pope7385
Marshall70215
Stevens7018
Clearwater68514
Lac qui Parle65716
Lake63715
Wilkin6259
Koochiching59610
Lincoln4841
Big Stone4573
Unassigned43768
Grant4298
Norman4248
Mahnomen4107
Kittson37219
Red Lake3174
Traverse2503
Lake of the Woods1951
Cook1140

Iowa Coronavirus Cases

Data is updated nightly.

Cases: 305606

Reported Deaths: 4278
CountyCasesDeaths
Polk45754449
Linn17795275
Scott15444163
Black Hawk13773236
Woodbury13016175
Johnson1211749
Dubuque11387150
Pottawattamie8992112
Dallas888671
Story869434
Webster469771
Cerro Gordo466768
Sioux455157
Clinton450361
Warren443938
Marshall427761
Buena Vista393429
Muscatine390477
Des Moines381841
Plymouth350368
Wapello344198
Jasper321959
Lee317130
Marion304952
Jones271349
Henry264330
Carroll255434
Bremer245048
Crawford231022
Boone218417
Washington217632
Benton209444
Mahaska193136
Jackson192031
Tama187757
Dickinson186026
Delaware173736
Kossuth173644
Clay168820
Wright164824
Fayette162322
Hamilton160029
Buchanan159923
Winneshiek155719
Harrison155162
Hardin154729
Cedar153219
Clayton151448
Butler148224
Page144715
Floyd139636
Cherokee139027
Mills136416
Lyon135332
Poweshiek132724
Hancock130224
Allamakee127928
Iowa125422
Calhoun12279
Grundy121226
Jefferson120724
Madison12039
Winnebago119429
Mitchell116234
Louisa115030
Cass113341
Chickasaw111612
Sac111215
Emmet110831
Appanoose110538
Union108822
Humboldt105519
Guthrie103024
Shelby102926
Franklin102418
Unassigned9310
Palo Alto9079
Montgomery85622
Keokuk85026
Howard84219
Monroe81218
Clarke7957
Pocahontas77611
Ida74630
Greene6927
Davis69121
Adair68820
Lucas6508
Monona64016
Osceola6409
Worth6113
Taylor5949
Fremont5126
Van Buren49712
Decatur4894
Ringgold4389
Audubon4158
Wayne41421
Adams2963
Rochester/St. Mary'S
Clear
wxIcon
Hi: 37° Lo: -1°
Feels Like: -10°
Mason City
Clear
wxIcon
Hi: 39° Lo: 1°
Feels Like: -10°
Albert Lea
Partly Cloudy
wxIcon
Hi: 37° Lo: 0°
Feels Like: -6°
Austin
Partly Cloudy
wxIcon
Hi: 37° Lo: -1°
Feels Like: -8°
Charles City
Partly Cloudy
wxIcon
Hi: 38° Lo: 1°
Feels Like: -12°
Get ready for a midweek warm-up!
KIMT Radar
KIMT Eye in the sky

Community Events