China is more exciting than usual these days. The party congress has approved a range of new stimulus initiatives that should prevent the GDP growth from dropping too much. Really interesting is the VAT and tax relief for corporations, where the financial market initially expected a total relief of around 1,400 billion yuan, but will turn out to be as much as 2,000 billion RMB.
The manufacturing sector, as well as small and micro enterprises are favoured by the tax adjustments. The latter group is actually particular interesting because up to 10 pct. of China’s population, i.e. approximately 140 million people, consider themselves as entrepreneurs to some extent.
I judge that the government’s ongoing special focus on creating extra viable conditions and opportunities for entrepreneurs is a sign of its long-term importance for the Chinese economy. A high percentage of entrepreneurs, and wannabe entrepreneurs, in the population simply ensures a different dynamic in the economy, which is in contrast to, for example, the static Eurozone economy.
Other initiatives have been announced, however, no one has officially commented on the credit growth, despite it being a Chinese instrument to fuel the economy. My bet is that the Chinese government will try to push the credit growth higher towards a 10 pct. growth this year and in 2020. The consequence could be a growth in the debt of GDP ratio by around five percentage points per year- this could very well worry foreign investors.
Despite the various growth initiatives, the Chinese government has also acknowledged that the GDP growth will shirt to low-gear again this year. The official expectation is now a GDP growth between 6 and 6.5 pct. in 2019, therefore, I see no reason to change my own view since long, that China’s GDP growth hits 6 pct. faster than the financial markets expect.
The graphic shows the business expectations measured among Chinese corporations done by the country’s official statistical bureau. It should be noted that the official survey used larger companies as respondents, whereas the alternative report from Caixin used smaller Chinese companies.
Regardless which of the surveys one observes, it will show that the manufacturing sector has had growing doubts of the future. My expectation is that the confidence will increase during the coming months due to the government’s new growth stimulus packages. The improvement is not in itself sustainable, though I see it as most likely to give a feeling of temporary relief in the economy.
Another factor for greater optimism is naturally how the trade related negotiations between USA and China are developing. What looks like a way to the end of the US – China trade war adds extra spice these days. It is surely already priced-in the stock market that an agreement is coming closer.
But I do not necessarily regard the deal as done yet, and I believe that the American delegation will use some of the usual tricks when negotiating. Most obvious is noise, like to signal a sudden walk-away from the negotiations, which of course will again increase the nervousness among businesses and investors. I trust that a deal will be reached between Washington and Beijing, though the road still has some bumps ahead like the example with tactical noise.
In my view, an important question is just how sustainable a possible new agreement between USA and China is in reality?
Will some of the US–China tensions of political origin be downplayed for a period of time after a new agreement? Due to Beijing’s growing trust in China’s own political importance internationally, in particular in the Asia Pacific region, an ongoing tension between Washington and Beijing is unavoidable in my view. Such a situation will surely spill-over on the trade relationship between the two superpowers in the future, leading to retuning nervousness.