Economic Strength Keeps Xi's Hand Strong Against Trump
China's economy grew by 4.8% in the quarter ending September. This figure was higher than expected but represents the weakest growth rate in the past year. This statistic was released alongside a batch of economic reports, such as retail sales and industrial production, which paint a mixed picture of China's economic condition.
Consequently, the government announced that the economy, even with the weakest growth rate in the past year, is still on track to meet the 5% economic growth target. However, the retail sales report released alongside the GDP was weak, and investment in the first nine months of the year fell by 0.5% compared to the previous year. This data indicates that strong export growth has masked the weakness in other sectors of the economy.
China has benefited from a wave of unprecedented export growth driven by global demand, which has kept the overall growth close to the government's target. Regarding exports, trade balance statistics show that US tariffs did not significantly impact the sale of Chinese goods; in fact, the Chinese sold the goods at a discount to alternative markets, and the wave of cheap and quality Chinese products has spread globally once again.
Deflation Trap, The Main Challenge for the Chinese
Inflation reports show that the economy remains caught in a deflation trap. Due to weak demand, the Chinese market is highly competitive in terms of pricing, and companies are competing with each other to offer lower prices. This situation has led to a reduction in producers' profit margins and is one of the main reasons for the decline in investment in the Chinese economy. Furthermore, demand has not yet recovered following the widespread real estate market slump.
Consequently, nominal GDP (which is not adjusted for inflation) declined by 3.7% in the quarter ending September due to deflation. Nominal GDP is usually reported higher than real GDP in inflationary conditions. However, in deflation, conversely, nominal GDP is less than real GDP.
The implicit GDP deflator (which is the ratio of nominal GDP to real GDP) has declined for the tenth consecutive quarter, a sequential downward trend in this index is considered a strong indication of a disinflationary cycle in an economy.
Expectation for New Monetary Stimulus
Despite high economic growth, the detailed data still shows weakness in the domestic economy. Therefore, we expect monetary and fiscal stimuli to be provided by the Chinese government, but these stimuli will be targeted, rather than simply injecting money into the economy through interest rate cuts.
The Chinese government will likely focus on the supply demand imbalance and the structural factors that caused it. Simply cutting interest rates or injecting money will not solve the current problem of the Chinese economy. China needs to fundamentally address the gap between consumption and production. Actions to encourage investment, reform budget and fiscal policies to increase people's purchasing power, and changes in certain market structures, such as reducing monopolies, are measures the government can implement to resolve the structural economic issues.
summary
The 4.8% economic growth in the third quarter was higher than analysts' expectations but is considered the weakest pace of economic growth for the year. However, Chinese officials state that they are on track to achieve the 5% growth target. The economy has primarily benefited from exports, and the strong global sales growth of Chinese goods has masked the weakness in other sectors of the economy.
"Nevertheless, the economy is faced with the challenges of the deflation trap and weak domestic demand, which still strengthen the probabilities of implementing supportive policies. However, China's supportive policies must be targeted and focused on the structural problems that created the gap between supply and demand.