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For the Chinese Economy, It Is Better to Be Slow than Make Blunders

Mar 07, 2019
  • Zhong Wei

    Professor, Beijing Normal University

The year 2019 has witnessed a slowdown in global economic growth, and the expectations of the IMF and the World Bank for this year's economic performance reflect their worry about the slowdown in growth. Christine Lagarde, Chairwoman of the IMF, pointed out that the slowdown in economic growth, tightening liquidity of major central banks, the uncertainty and spillover effects of Brexit, trade disputes between China and the United States and the rise of global protectionism will continue to affect the global economy. A survey conducted among American economists shows that most of them are worried that the U.S. economy may fall into recession at the end of 2021.

China cannot stay out of the global economic slowdown because it is an active participant of globalization. The Chinese economy, which is in the process of changing gears and undergoing structural transformation, would rather adjust its growth expectations. It is better for the Chinese economy to be slow and for China to place more emphasis on the quality of economic growth and bottom-line thinking in order to prevent systemic risks and blunders while dealing with this complex situation. To put it simple, we prefer to be slow rather than make blunders.

How will the Chinese economy perform in 2019? During the Spring Festival, public consumption was stable, and the transportation sector was orderly during the peak travel season. Both areas conformed to expectations and could indicate the tone of global growth. In 2019, investment in industry and real estate will be generally stable, and investment in new types of infrastructure is likely to be strengthened. Traditional modes of consumption will slow down, car purchases will cool down and the mobile phone displacement cycle will continue, displaying the trend of a consumption slowdown. China's economic growth rate in 2019 may be between 6% and 6.5%. The recovery cycle since the fourth quarter of 2016 is over.

How will China loosen its macro-control in 2019? The tone of its monetary policy has shifted from neutrality to steadiness, and which emphasizes that there is still much room to adjust monetary policy. Non-governmental financing and credit exceeded expectations this January. The fiscal policy emphasizes both tax and fee reduction, and the slowdown in economic growth requires macro-control to be counter-cyclical. With the combination of the slowdown in economic growth and cyclical regulation, variables remain, especially in asset prices and the RMB exchange rate.

Since the end of 2018, both the US stock market and China’s A-share market have shown signs of recovery. If the stabilization of the US stock market is related to the dove information released by the Federal Reserve, the A-share market can be summarized as having a good start in 2019. The combination of good news, such as the valuation advantage, restoration of market confidence, inflow of foreign capital brought by financial liberalization, expectations for loose liquidity and institutional innovation, has brought about a rebound in the A-share market. People have even started talking about the bull share and bond markets. Restricted by the slowdown in economic growth and limited improvement of corporate earnings, asset price inflation depends largely on people's expectations for counter-cyclical regulation.

The RMB exchange rate is another variable. In different quarters of 2018, there were major fluctuations of the international balance of payments, and the exchange rate fluctuated accordingly for a time. How will the international balance of payments be in 2019? First, the opening of the financial market may lead to accelerated inflow of foreign capital, especially to securities in China where investment has risen markedly. Second, experience shows the slowdown of economic growth often results in the phenomenon that the slowdown in import growth is more obvious than the slowdown in export growth, which is improperly referred to as a "recession-type surplus." Third, the Sino-US trade disputes may reach a framework settlement agreement, which will somehow hinder trade uncertainty in China and even the world. Fourth, the strength of the US dollar may be unsustainable. These four facts may promote the relative stability of the RMB exchange rate and rise of the real effective exchange rate.

What will the risks of economic operation be in 2019? There might be three risks in the medium term. First, the slowdown in income growth potentially increases the pressure of employment and explicitly contributes to a decline in consumption. The tendency will be more evident when the income tax reform is fully implemented. Second, the slowdown in growth will bring some deflationary pressure. In 2019, the GDP deflation index may be less than 1%, and the price slump will not be conducive to the improvement of the earnings expectations of enterprises. Third, the question of how to dredge the transmission mechanism within the monetary policy and how to effectively enhance the capacity of financial service entities, especially inclusive, small and private enterprises and enterprises in key industries. Another question that remains is how to accurately eliminate and manage systemic financial risks under the dual pillars of the monetary policy and macro-prudence, which has proved to be extremely difficult. This needs multiple methods and joint efforts made by different parties. 

2019 is an important year for deepening the financial supply-side structural reform. On February 22, members of The Central Politburo of the Communist Party of China held its 13th collective study on improving financial services and preventing financial risks. General Secretary Xi Jinping stressed that we should deepen our understanding of the international and domestic financial situation, correctly grasp the essence of finance, deepen the financial supply-side structural reform and balance the relationship between stable growth and risk prevention. This shows that the supply-side structural reform has been extended to the financial sector after it had achieved remarkable results in the real economy.

In his speech on February 22, Xi Jinping said that the economy would thrive if the financial sector thrives, and that the economy would be stable if the financial sector is stable. His speech shows that the economy and the financial sector are mutually dependent.

With a stable start, flexible macro-adjustments and many other variables in 2019, it is urgent to deepen financial supply-side structural reform, which requires us to be neither aggressive nor conservative, and instead be slow and avoid making blunders.

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