SINGAPORE, February 18, 2019 – The Chinese economy continues its moderating trend and growth is expected to moderate further to 6.2 percent in 2019 from 6.6 percent in 2018 due to structural adjustment, deleveraging, and headwinds from the trade war with the U.S. This was highlighted in the 2018 Annual Consultation Report on China published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country from July 3 to 17, 2018 and data available up to October 19, 2018.

The U.S.-China trade war has become one of the major risks for the Chinese economy, putting downward pressures on confidence, exports, and growth. According to AMRO’s assessment, the negative impact of the tariffs imposed by the US on China’s GDP growth will be about 0.2 percentage point in the next few years, taking into account the moderate size of the stimulus package in China.  Moving forward, if the trade war escalates further, it could affect investment sentiment and put more downward pressure on the economy.

Strengthened policy efforts on deleveraging have helped reduce domestic risks to financial stability compared to 2017. At the same time, the growth of corporate debt has begun to slow down and overcapacity in the heavy industries has been reduced according to the targets. Notwithstanding the progress, some pockets of risks have become more prominent. Although the level of household debt to GDP is still low, it has been rising rapidly. Thus, the authorities should stay vigilant, especially on issues with regard to the lowest-income group with low repayment capacity. Credit risks for some small- and medium-sized commercial banks have increased. The collapse of some of peer-to-peer lending (P2P) platforms is an indication of higher risk in this sector, despite limited risk in the overall financial sector.

Against the above backdrop, macroeconomic policy has become more challenging with the urgent need to cope with headwinds from the trade war and its impact on growth, together with efforts to maintain macroeconomic and financial stability, and pursue further reforms. Policymakers should continue to focus on implementing policy measures to mitigate the impact of the trade war on growth, especially in the export sector. Counter-cyclical fiscal measures can take the lead in buffering the impact on the economy. The pace of financial deleveraging could be more gradual so that banks can provide continued financial support to the economy. Enhanced efforts should be made to diversify the export markets, including through enhancing trade cooperation. As the trade tension will likely be protracted, it is crucial to focus on stabilizing market confidence, reducing domestic vulnerabilities and supporting growth through further strengthening the supply side and other reforms.

The fiscal policy should also continue to support structural adjustments. Tax and spending measures to support the development of the new digital economy and small and medium enteprises are essential for further developing new frontiers of businesses and increasing employment. Establishing a more comprehensive social safety net is also key to supporting consumption, addressing aging population, and mitigating income inequality.

Safeguarding macroeconomic and financial stability should continue to be a top priority as it is a prerequisite for achieving a sustainable growth path and quality development. State-owned enterprise reform, which is key to coping with high corporate debt and pockets of vulnerable corporate sectors, should be further strengthened.

About AMRO and AMRO’s Annual Consultation Report:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization, established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO fulfills its mandate by conducting regional macroeconomic surveillance, supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.