China Macro Outlook 2020
From a cyclical perspective, China’s current economic downturn, which started in early 2018 and lasted throughout 2019, can be attributed to two main headwinds – financial deleveraging on the domestic front and the US-China trade war on the external one.
In our view, these two factors will likely continue to weigh on Chinese growth in 2020, but to a lesser extent than in 2019 as the impact of measured policy stimulus kicks in. In particular, we expect the People’s Bank of China (PBoC) to maintain an easing policy bias in 2020 to support domestic demand. On the fiscal front, after important tax cuts this year, we belive the focus will likely be on increasing government spending. In our view, the Chinese government may expand its fiscal deficit target to 3.0% in 2020 from 2.8% in 2019.
Overall, we project Chinese growth to moderate in 2020 to 5.9% from the 6.2% expected in 2019. The Chinese growth trajectory in 2020 may be front loaded, with higher growth in H1 but softer momentum in H2. The latest data point to some improvement in manufacturing. But, despite policy stimulus, this may not be sustained throughout 2020 as global demand will likely weaken further in the second half of 2020, especially as US growth loses steam.
In response to rapidly rising debt in the corporate sector and ballooning local government borrowing, the Chinese government started a deleveraging campaign in late 2016. While the campaign may be close to an end, we do not expect a U-turn in government policy, and the economy is not ready to lever up again. The aggregate debt level, which is still rising (although at a slower pace than before), remains a concern for Chinese policy makers, so we expect containing financial risks to persist at the top of the government’s priority list.
On 13 December, the US and the Chinese governments announced that they had reached a ‘phase one’ trade deal. While we this as a positive development after a period of elevated US-China tensions, we do not believe this marks the end of the trade war. As we have argued before, the on-going tensions between the US and China are the result of much broader strategic rivalry between the two on multiple fronts, particularly for technology supremacy and geopolitical dominance.
Over the longer term, we believe that the Chinese government still has further room to use monetary and fiscal policy to support growth if necessary, especially the latter. However, do not believe the government will resort to any extraordinary measures to boost growth in the near term.