Trade war bites into China’s growth rate

Although China has the tools to manage growing headwinds from its trade war with the United States, a strong stimulus is likely to pile on even more debt, while a loose policy could result in the fall of domestic interest rates which is likely to negatively impact its currency.

According to government advisors who recommend economic policies to Beijing’s leadership, China should lower 2019’s growth target to the range of 6.0% to 6.5% given the headwinds from the trade war with the United States.

This week’s annual Central Economic Work Conference, a closed-door gathering of top party leaders and policymakers, is being closely watched by investors for any fresh policy steps to ward off a sharper economic slowdown.

The conference is likely to be convened on Wednesday, as per two policy insiders. However, the meet, is unlikely to result in any public announcement of economic targets, which are usually reserved for the opening of the parliamentary session in early March.

With the U.S. tariffs taking a toll on the Chinese economy, government advisers and think tanks are calling for speeding up of economic reforms as well as opening up the private sector which is currently stifled by state controls.

“Next year’s growth target could be 6.0-6.5 percent as the economy is likely to slow from this year,” said a policy insider, who advises the government, on the condition of anonymity.

According to the Chinese Academy of Social Science, a top government think tank, the economic growth rate for 2019 is likely to clock 6.3% – its weakest since 1990. In 2018, the Chinese economy grew at an estimated 6.6 %.

A strong policy stimulus is likely to further pile on debt.

A growth rate of 6.0% for 2019 is seen as the bottom line midst concerns of employment due to domestic and external pressures.

“The economy is expected to slow next year, but the situation won’t be very serious if we can manage it well, because room for expanding domestic demand is relatively big,” said an adviser.

Incidentally, a politburo meeting last week pledged to keep China’s economic growth within a “reasonable range” next year.

Despite China’s face saving bravado in its trade war with the U.S., Chinese government officials and China watchers have warned of greater risks to the economy in 2019 if the trade war with the United States continues.

Last week, Yi Gang, the chairman of China’s central bank stated, although the country’s monetary conditions should be relatively easy to support, economic policy cannot be too loose since a fall in domestic interest rates could create significantly impact the Renminbi.

The central bank is likely to deliver more cuts in banks’ reserve requirement ratios, to add to the four reductions this year, but it may not rush to cut benchmark interest rates that could hurt the yuan, opine policy insiders.

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