BEIJING — China’s GDP witnessed its slowest growth in a decade in the first nine months of the year with output dented by a growing debt pile, stagnating growth and a trade war with the U.S.
Gross domestic output for the first three quarters of 2018 was 65 trillion yuan, a year-on-year increase of 6.7 percent, according to the country’s National Bureau of Statistics. It was the lowest increase in a decade, when the world economy was in the throes of a financial crisis.
Although many have cited the U.S. trade war as the reason behind the slowdown, Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, believes the rebalancing is long overdue and has almost nothing to do with the trade war. Instead, he said, it has to do with China’s debt pile.
“China’s real growth rate is probably less than half the current GDP growth rate. The only way that China has been able to keep economic activity growing at the much higher GDP growth target is by allowing even faster growth in its debt burden, which is among the worst in the world,” he said.
“Beijing has been trying to get debt under control for many years, but because doing so means automatically that GDP growth rates must fall substantially, it has been politically very difficult for the country to do so.”
He added that in the past year there has been increasing pressure to rein in credit growth, which the government has committed to doing. “But they still have a long way to go,” he said.
Jonathan Fenby, author and China chairman at TS Lombard Research Group, said the slowdown had been widely expected. Following economic tightening measures earlier in the year. “It is a sustainable rate. The tariffs have not bitten much so far,” he said.
They will begin to take their toll soon.
Alicia Garcia Herrero, chief economist for the Asia-Pacific region at Natixis and senior research fellow at Bruegel, said that down the road, the U.S. interest rate hike and the escalation of the trade war will remain “the key negative factors” affecting the Chinese economy.
“The People’s Bank of China started its intervention in the foreign exchange market by first imposing reserve requirement on foreign exchange forward transactions and then on the counter cyclical factor. And we expect to see more accommodative policies to bear the upcoming pressure,” she said.
The latest data showed that Chinese domestic consumption remains stable. Expenditure totaled 14,281 yuan per capita, a nominal year-on-year growth of 8.5 percent, and one percentage point higher than last year. Real growth was 6.3 percent after price adjustment.
Spending growth in urban households increased by 6.5 percent, while in rural households it increased by 12 percent.
In terms of disposable income, the data for the first three quarters of the year showed that national per capita disposable income was 21,035 yuan, a nominal increase of 8.8 percent year on year, or a real increase of 6.6 percent after price adjustments.
This was broken down into a per capita disposable income of 29,599 yuan for urban households and 10,645 yuan for rural households.
However, there is a worry that Chinese shoppers are downgrading their purchases and spending less. “I think overall consumer sentiment is still reasonably strong. Having said that, we are starting to see significant downward pressure on the real estate market,” said Benjamin Cavender, principal at China Market Research Group.
“That, coupled with the decline in the strength of the yuan versus the U.S. dollar, has definitely impacted sentiment and spending power. If the trade war continues and the RMB declines in value further and crosses the 7 RMB to the dollar threshold it is possible that we see a significant slowdown in consumer spending over the next quarter.”
Herrero, chief economist for the Asia-Pacific region at Natixis, argued that the Chinese economy is still “on the slowdown path” with weak business sentiment.
“The official PMI for both manufacturing and non-manufacturing sectors dropped in September. Retail sales also worsened in September to the lowest of the year at 9.3 percent year on year. However, the service related sales, such as medical care, still saw solid growth at around 20 percent, which helps stabilize the consumption growth.”
The economic data was released on the heels of the news that President Donald Trump plans to withdraw from a treaty that allows Chinese retailers to ship packages to the U.S. at discounted rates, part of his efforts to punish what he sees as unfair trade practices.
Herrero added that the plans to withdraw discounted foreign postal deliveries “could be viewed as an extension of the US-China economic conflict. With the removal of subsidy under current system, the rates for shipments from China to the U.S. would definitely increase. So the change could benefit U.S. merchants and shippers.”
Cavender at China Market Research Group said that with regard to the mail pricing issues,“I’m honestly not sure what China will be able to do to respond, as at some point any further retaliatory action will only end up hurting consumers in China.”