Growth will continue to slow in an orderly manner in 2020
This year, China ’s GDP growth has slowed to about 6.1%. The main reasons are Sino-US trade frictions, and weak investment and net exports. We expect the Chinese government’s GDP growth target for 2020 to be set at “about 6%”, further lowered from “6% to 6.5%” in 2019. The real growth rate may slow down to 5.7% in 2020. If China and the United States continue to negotiate and reach a partial agreement, China’s economic growth rate may be closer to 6% in 2020.
Investment will stabilize and performance of each sub-indicator will vary. The growth rate of China’s fixed asset investment in 2019 will further slow down to 5% from 5.9% in 2018, mainly due to sluggish manufacturing, weak infrastructure investment and cooling of the real estate market. The year-on-year growth rate of fixed asset investment in the manufacturing industry has fallen to a record low of 2.5%, which is much lower than the 9.5% in 2018, mainly due to shrinking interest rates of industrial enterprises and sluggish manufacturing production. Sino-US friction continues, and manufacturing investment may remain weak in 2020. The year-on-year growth rate of infrastructure fixed asset investment has also dropped to about 4%, which is lower than 4.7% in 2018. However, given the increased local government debt issuance and increased funding support for infrastructure, the growth rate of infrastructure investment in 2020 Expected to rebound to mid-to-high single digits. Real estate fixed asset investment is relatively stable, with an annual growth rate of 9% to 10% in 2019, but it is likely to slow down next year, as developers face a credit crunch and slow down the pace of land acquisition, and the lag effect will gradually appear. In short, we expect that the growth rate of fixed asset investment will stabilize at 5% to 6% in 2020. Infrastructure investment is expected to recover moderately to compensate for the slowdown in real estate investment and the weakness in manufacturing investment.
Retail sales may weaken
Consumer staples bring dawn to retail sales. The year-on-year growth of retail sales in 2019 slowed from 9% in 2018 to about 8%, which was mainly dragged down by a sharp decline in car sales-cars are the largest segment of retail sales (accounting for about 10%), and the structure Sexual and cyclical adverse factors are the main reasons for the decline in car sales. On the other hand, sales of essential consumer goods (food, beverages, cosmetics, etc.) have grown from high single digits to low double digits this year. We expect retail sales to weaken next year due to weak domestic demand, but given the optimistic outlook for consumer staples, retail sales are still expected to achieve high single-digit growth.
Exports are expected to recover moderately. As the United States imposed tariffs on Chinese goods under the Sino-US trade friction, China’s imports and exports both fell into negative growth this year. We believe that export growth in 2020 still lacks a strong boost. If Beijing agrees to increase purchases of US agricultural products and launch more easing policies to boost domestic demand, China ’s import growth rate will exceed exports, but given the slowdown in economic growth, we expect that the import growth rate will remain low in single digits next year. China’s trade surplus will narrow in 2020, and the current account balance (% of GDP) may be close to zero.
Consumer inflation peaked in the first quarter of next year; PPI remains sluggish
In October this year, the consumer price index (CPI) grew at an annual rate of 3.8% in seven years, and the average in the first 10 months reached 2.4%. Since March, soaring pork prices have been the main reason for the rising CPI, and the shortage of supplies caused by African swine fever is the reason for the soaring pork prices.
Contrary to the CPI, the producer price index (PPI) has been hovering around 0% this year, and even fell to a negative number in the second half of the year. As the base effect of energy prices subsides and domestic demand stabilizes, the PPI index is expected to turn positive next year.
In 2020, China’s monetary and fiscal policies should still focus on stable growth to cushion downward economic pressure, and lowering standards, lowering interest rates, and increasing local government debt issuance should all be considered in the policy. By the end of November, the People’s Bank of China had reduced its quota by 150 basis points and released liquidity of nearly 2.4 trillion yuan. We expect that by the end of next year, the standard will be reduced by 100 to 200 basis points. As soon as next year, the standard will be reduced by 50 basis points before the Lunar New Year. Fiscal policy has continued to support the issuance of over 3 trillion local government bonds before the end of November this year to support infrastructure, and the quota is expected to rise to 4 trillion next year.
The writer is UBS Wealth Management Asia Pacific Investment Director and Chief Chinese Economist. She writes for Xinhua / Xinwang, sharing economic and investment perspectives.