2019 is a year full of ambiguities for the Chinese economy, mainly due to two reasons. The first is the important psychological pressures caused by the US-China trade war, which could potentially reverse the global trade trends that were largely dominated by China in the last decades. The second is the unclear messages conveyed by the Chinese government regarding its economic policy. In response to pressures coming from abroad, the government has alluded to possible reforms. Yet it has also taken defensive measures in order to resist these pressures. It has intensified its efforts to restrain domestic debts and liabilities. Yet at the same time, it has also adopted new stimulus measures, including new credit lines, to revive the economy. Adapt and resist, stop and go... No wonder that, after a phase of seeming invulnerability to US pressures, Chinese economists are showing signs of anxiety. Indeed, not only is the economy drifting, but it might also be tanking.
Such observations could however end up being the mere expression of unfounded pessimism after a phase of unbridled optimism.
The trade conflict has already had two significant consequences.
- The first was the reboost of China’s exports to the United States, up until October 2018. A drop in the RMB to dollar exchange rate, and a rush to get exports past the gate before the late September tariff increases resulted in China’s highest ever trade surplus with the United States. China’s global imports also accelerated. This was likely caused by consumers’ and companies’ anticipation of tariffs and other upcoming import restrictions.
- Meanwhile, the government has been consolidating a familiar policy: reining in speculation and bursting the economic "bubbles". It is the very policy that had been implemented, on the eve of the Great Financial Crisis of 2007-2009. At the time, China’s credit and budget discipline was perhaps purely coincidental, but it significantly helped to avoid widespread panic when the global crisis hit. Now, given that China is one of the trade war’s two main players, it is easier for authorities to foresee trouble and thus to tighten their control over runaway credit and finance. Official statements in the spring of 2018 started praising state enterprises and the state economy again. Shadow banking, which, in China, really is the "shadow of banks" and plays a significant role in structured funds with higher returns for savers, was brutally curtailed. So was, consequently, credit to private companies: no doubt the one-party state is in a good position to protect itself from the forecasted storm. However, local authorities have been hit both by anti-corruption campaigns and by a major curtailing of infrastructure projects. This also explains state companies' frenzy to get involved in the international Belt & Road projects. In 2018, investment dropped like never before in China.