China’s Stimulus

(Bloomberg) — China’s leadership signaled that further
stimulus measures are being planned, as disappointing economic
data showed that the current piecemeal approach isn’t working.
The nation’s economic situation is changing, downward
pressure is increasing, and the government needs to take timely
steps to counter this, according to a statement from a Politburo
meeting Wednesday chaired by President Xi Jinping.
The signal of increasing urgency came just hours after
purchasing manager reports showed an across-the-board
deterioration that risks spilling into a broader drag on global
growth. The world’s second largest economy is being damaged by
its trade war with the U.S. and a domestic debt cleanup.
With those pressing constraints, officials have added
modest policy support so far, ranging from tax cuts to
regulatory relief, rather than repeating the fiscal firepower
seen after a previous slowdown. Investors seem unpersuaded by
the drip-feed approach with the yuan hovering around a decade
low and stocks sliding.
“Accepting slower growth has long been a challenge for
Beijing, but now the rate of slowdown is firmly out of the
comfort zone,” said Katrina Ell, an economist at Moody’s
Analytics in Sydney. “In recent years the balancing act has been
addressing risks in the financial system against pressure to
stabilize economic growth. It appears the latter is again more
of a priority.”

Slumping PMIs

Manufacturing growth slowed to the lowest level in more
than two years, and while economists had seen further tax cuts
coming, few had predicted bigger stimulus for now. An export
sub-gauge fell deeper into contractionary territory, suggesting
that an earlier export rush to beat U.S. tariff deadlines will
fade sharply.
The U.S. is preparing to announce by early December tariffs
on all remaining imports from China if talks next month between
presidents Donald Trump and Xi Jinping fail to ease the trade
war. An increase in the tariffs already in effect on $200
billion of Chinese imports scheduled for January would provide a
stiff test to many exporters and could quicken the shifting of
global supply chains.
JPMorgan Chase & Co. CEO Jamie Dimon said escalating trade
tensions between the U.S. and China are increasingly starting to
resemble a trade war, rather than just a “skirmish.”

Domestic firms bracing for 2019 jump in tariffs Risk of
synchronized global slowdown buildingGDP data shows worsening
household finances amid slowdownChina is fighting the wrong yuan
battle: Christopher BaldingAll our reporting from the 2018
Canton Trade Fair

China’s leaders from Xi Jinping on down had politically
committed to avoiding a ‘flood’ of stimulus, and a multi-year
campaign to curb the rate of debt expansion appeared to be
paused, not scrapped. Xi’s right-hand man on the economy, Liu
He, has long advocated a shift away from credit-fueled growth at
all costs and senior officials continue to warn of the dangers
of excess debt, even as they seek to channel more money to cash-
strapped private businesses.

Preemptive, Timely Action

“The leadership is paying great attention to the problems,
and will be more preemptive and take action in a timely manner,”
according to the statement Wednesday. The Politburo reiterated
that China will maintain a proactive fiscal policy and a prudent
monetary policy, while trying to find solutions to help private
businesses.
Earlier Wednesday, data from around the region suggested
that, aside from the U.S., the global economy is heading into a
difficult period. Industrial output for September in South Korea
and Japan came in below estimates, as did third quarter output
in Taiwan.
“The spring of 2019 will be the real difficult time for
China as multiple factors such as trade tension, slower sales of
durable goods and the end of a property boom in lower-tier
cities weigh on growth,” Lu Ting, chief China economist at
Nomura International Ltd. in Hong Kong, said after the
announcement. “It’ll be a test if China can sustain growth of
around 6.5 percent. Policy makers are likely to further cut
taxes and ease property purchase controls in bigger cities to
lift the economy.”
The government and central bank have already this month
introduced a raft of measures to stabilize sentiment, adding to
steps to boost liquidity in the financial system, tax deductions
for households and targeted measures aimed at helping exporters.
Those measures have yet to have much effect.

Policy Implementation

The leadership also emphasized implementing policies that
have already been announced, and said China will continue to
“actively and effectively” utilize foreign investment and defend
foreign companies’ legitimate rights.
If new stimulus measures accelerate China’s debt increase,
the government will face the accusation that its determination
to deal with the credit overhang has crumbled, according to
George Magnus, an economist at Oxford University’s China Centre.
“It was always the case that the acid test of the
government’s resolve to deleverage would be its nerve if the
economy started to falter,” he said. “Which it is.”