Lower growth rate will stabilize economy

The slowdown in China's economic growth is no news. Since 1981, the Chinese economy expanded at an average annual rate of 10.1 percent before breaking at 8 percent in 2012. Three years later, the growth rate fell below 7 percent. In the third quarter of 2019, the economy, for the first time in 27 years, grew just 6 percent. And next year's growth could slip below 6 percent.

But despite the calls for stimulus from businesses and the financial market, and despite the impact of the US-China trade war, the central government and the central bank have been "surprisingly" hawkish and consistent. Compared with the US Federal Reserve's 75 basis-point rate cuts and negative interest rates in Japan and the eurozone, the central bank's 5 basis-point and 10 basis-point cuts this year in medium-term lending facility and prime lending rates are minimal and insufficient to allay the market's fears over further economic slowdown. Yet next year, too, is likely to be disappointing for people who have bet on a huge stimulus package.

Misreading the govt's actions

How so many investors got it wrong when it came to predicting government actions?

First, many couldn't think like the government officials in the "new era". In the "good old days", officials did not hesitate to step in to boost growth when facing an economic downturn, simply because GDP growth was the most important factor for their promotion. The negative side effects of a high growth rate could be enormous and long-term－be they rising debts and financial risks, overcapacities, or widespread market distortions.

In the new era, the key performance indicator for government officials is based on a matrix of factors comprising economic growth, environmental protection, employment promotion, risk management and Party building. In other words, the weight of GDP growth has dropped dramatically. As a result, the incentive for facilitating high growth has greatly reduced.

Failing to identify real cause of slowdown

Second, perhaps some observers failed to identify the real cause of the economic slowdown. The end of the expansion cycle of the world economy, unfavorable financial conditions and industrial output (especially in the auto sector) apparently slowed China's economic growth. But, basically, it is a structural slowdown, which was well managed by the Chinese government until the United States-triggered trade war intensified it.

Unfavorable demographics, diminishing return on capital, slower productivity growth and the government's determination to curb financial risks, too, are behind the slowdown.

For instance, the M2 and total credit growth rate－a major driver of China's growth－fell to 8.4 percent and 10.7 percent from 15.4 percent and 12.5 percent in 2016 when the financial de-risking campaign started. Monetary and fiscal policies by design will not address the structural problem but enlarge the existing market distortions and misallocations of resources, making future reform more difficult.

Growth rate within predicted range

And last, many might misread the current economic situation and overestimate the importance of fiscal and monetary policies. China's economic slowdown is real, but the year-to-date 6.2 percent GDP growth rate is still within the government's 6.0-6.5 percent annual growth target for 2019. As such, the country's leadership will surely achieve the goal of doubling per capita GDP from the 2010 level and build a moderately prosperous society in an all-round way with even a sub-6 percent growth rate based on revised GDP data for 2018.

In the labor market, the government is two months ahead in achieving the more than 11-million-job-creation target (about 11.9 million jobs were created by the end of October), with the urban unemployment rate being relatively stable at 5.1 percent. As other countries' experiences show, no government would stimulate the economy when it is on path to meet its goal.

But tax cuts, slower economic growth and land sales have increased China's fiscal deficit to a level higher than that of several advanced economies, and the number of large profitable infrastructure projects has become scarce due to past build-up, which will constrain the government's ability and effectiveness in spending.

Admittedly, the central bank has more policy room. But it has valid reasons to be strategically patient. Still, the authorities need to take measures to control the consumer price index that has risen sharply mainly due to skyrocketing pork prices.

Expansionary monetary policy will increase risks

Yet rapid monetary easing could derail the government's deleveraging campaign and long-term growth trajectory. With financial repression and weak business confidence in the real economy, expansionary monetary policy will increase the risks for the housing market, which is linked with a major share of public and private debt.

Furthermore, Japan's experience in the 1980s should deter the Chinese government from injecting massive stimulus into the economy. In the 1980s, in order to offset the negative shocks from US-Japan trade disputes and maintain high economic growth, Bank of Japan aggressively cut interest rates and thus expanded the housing and equity bubbles instead of addressing the structural problems of the economy. Eventually, the housing and equity bubbles burst in 1991, leading to "two lost decades" for Japan.

Expectedly, China seems poised to lower its growth rate to around 6 percent for 2020, and remains cautious about using policy ammunition. However, given the size of its economy, China will still contribute about 30 percent of global growth, not to mention China's own economic growth will be more qualitative and balanced.

The author is a senior economist at CRU International, a global commodity research and consulting firm.

Views expressed are his own and do not represent those of the firm or China Daily.