CHINA (OBSERVATORY) – China’s leaders made it clear that the growth of the world’s second-largest economy could slow down and that they are ready to change the development strategy if trade or financial risks threaten a sharp slowdown.
According to a statement published by the state media on Monday after a meeting of the Politburo headed by President Xi Jinping, difficult work is needed to achieve economic goals this year amid a difficult geopolitical situation. In the first quarter, growth remained stable, but forecasters still believe that the economy is slowing this year. The factors of decline, in their opinion, are the tension in trade with the US and the campaign to clean up the financial sector.
Since the Politburo statement mentioned the need to increase domestic demand for the first time since 2015, and there was a reference to the need to reduce the share of borrowed funds, investors are considering a change in tone as a signal that the government can facilitate tougher measures if this is justified. On Tuesday, shares in Shanghai showed the largest rally in two months.
Despite the fact that tension in trade with the United States is falling, the statement notes that the leaders are prepared to prevent any potential economic instability. On Saturday in Washington, US Treasury Secretary Stephen Mnuchin hinted at a truce, saying that he was considering a trip to China and “remains cautiously optimistic” over overcoming differences on trade issues.
Economists surveyed by Bloomberg forecast a slowdown this year to about 6.5%, and then the slowdown will continue over the next two years. In 2017, expansion was achieved for the first time in 7 years, accelerating to 6.9%.
Leaders at the meeting called for “bolder reforms and timely implementation of major programs aimed at achieving openness,” the official Xinhua news agency reported. They said that China should cut spending on business financing.
As friction with the US intensifies against the backdrop of the development of high-tech industries from biotechnology to robotics, the Politburo also called for a breakthrough in the development of basic technologies and support for new industries and enterprises.
Last week, the NBK cut mandatory reserve requirements, saying that this step was aimed at smoothing potential liquidity disruptions and providing lending to the economy. In recent months, politicians have also indicated that the planned tightening of fiscal policy still leaves room for a response to macroeconomic developments.
The tone of the Politburo meeting and the reduction of RRR indicate “the rate of tightening is likely due to external uncertainty in terms of trade tension and a faster decline in credit growth” in the first quarter according to a report by Robin Sin, a Chinese economist from Morgan Stanley.
“The emphasis made at the meeting of the Politburo on stimulating domestic demand and reducing the cost of financing the real economy, once again confirmed that the government is concerned about downward pressure,” said SWS Research Co. analyst. Meng Xiangjuan.
The next official health check of the economy will be held on Monday, when it is planned to publish the production index PMI. In March, it showed growth since November, as enterprises recovered after a seasonal decline at the beginning of the year. The markets and offices of China will be closed on Monday and Tuesday during the celebration of Labor Day.
According to Larry Hu from Macquarie Securities Ltd. in Hong Kong, it is still too early to talk about anxiety as a clear indicator of the direction of politics.
“The phrase” increasing domestic demand “is the answer to the last dispute between the US and China, China can agree now, but such a trade dispute may become a new norm in the future,” Hu said.