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Christine Lagarde new international tax system ft 11 March 2019
Federal Reserve and the European Central Bank, explaining their recent
sharp turn towards dovishness. ECB president Mario Draghi coined another of
his memorable phrases last week, saying that “pervasive uncertainty
<https://app.ft.com/content/4a5edd8a-41b3-11e9-b896-fe36ec32aece>” meant
downside risks, even relative to the central bank’s latest downgraded
growth forecasts, were still predominant.
Policymakers in the advanced economies have uniformly attributed the
downturn to “external” economic shocks, which is code for concerns about
the loss of economic momentum in China.
Towards the end of last year, these concerns seemed wholly justified.
China’s GDP grew by only 6.4 per cent on the official figures in the 2018
calendar year, the lowest growth rate in three decades. According to a
recent study published by Brookings,
<https://app.ft.com/content/961b4b32-3fce-11e9-b896-fe36ec32aece> the true
rate of growth, on more accurate data, may have been 2 percentage points
below that.
Furthermore, Chinese activity growth in the Fulcrum nowcasts nosedived to
just 4 per cent in December. This triggered much of the slowdown in global
growth, especially in the trade and manufacturing sectors.
So what has gone wrong with the Chinese growth engine in the last year? Two
factors have been important: a shift in monetary policy towards
deleveraging and a further knock to confidence from trade war fears.
Monetary policy shifted its focus towards deleveraging, especially in the
shadow banking sector, which has been the main source of financing for
infrastructure investment since the global financial crash in 2008.
In the 2018 calendar year, overall credit growth (known as total social
financing) grew in line with nominal GDP, broadly as the authorities
intended. But the effects on fixed-asset investment in state-owned
enterprises were more severe than they meant them to be and, by the year
end, investment growth had dropped to almost zero.
Small businesses have for years relied on lending from the shadow banking
sector to finance expansion, so they were also badly affected by the
authorities’ decision to squeeze that sector. The intention was to redirect
lending by state-owned banks away from the SOEs and towards small private
businesses, which represent the most dynamic source of new growth in the
economy.
This shift has not taken place, in part because banks have been reluctant
to lend to private companies against a background of rising debt defaults
and declining business confidence. In addition, the demand for credit has
been weak. The People’s Bank of China has made repeated attempts to
encourage more bank lending to the private sector, so far with limited
success.
Against this troubled domestic backdrop, the further hit to confidence
arising from fears of a trade war with the US has clearly not helped. The
imposition of new US tariffs on Chinese exports was a relatively limited
event last year, reducing Chinese GDP by only about 0.3 per cent, according
to several independent estimates.
But the increased intensity of tariff threats from the Trump administration
late last year risked doubling this direct hit to GDP from trade, and
adding an additional downside shock to domestic investment and consumption.
The economy seems to have anticipated these shocks ahead of implementation,
weakening domestic demand further.
Overall, the nowcast shows that activity growth fell by about 3 percentage
points during 2018. At a very rough guess, about half of this may have come
from the effects of the toughening in deleveraging policy throughout the
year, with the rest stemming from fears of a greatly exacerbated trade
conflict towards year end.
The question for 2019 is whether the easing under way in fiscal and
monetary policy will be enough to promote an economic recovery, given the
backdrop for trade policy emerging from the present round of Donald
Trump/Xi Jinping talks. These have not reached a firm conclusion, but both
presidents have strong domestic political reasons
<https://app.ft.com/content/3cf778ca-3f68-11e9-9499-290979c9807a> to avoid
a major escalation of the conflict. Markets have already priced in a
successful outcome and it seems reasonable to assume that the damage to
economic confidence more generally will abate in coming quarters.
On the domestic policy front, premier Li Keqiang delivered the government
work report
<https://app.ft.com/content/558d78d2-3eda-11e9-b896-fe36ec32aece> at the
National People’s Congress on March 5. Sometimes compared to the State of
the Nation address by the American president, this report included a
description of policy intentions for 2019, and economic objectives for the
coming year.
Overall, the tone was consistent with Mr Li’s policy stance of several
years. Although supportive of growth-sustaining measures, he is strongly
opposed to a return to old-style demand management that would involve
a blunderbuss increase in leverage, especially in the shadow banking
system. In fact, he has already expressed concern that releveraging may
have gone too far, given the very strong monetary and social financing data
for January.
Instead, support for demand will be more nuanced, and probably more focused
on fiscal policy, notably tax cuts, than previous stimulus packages.
Although the official target for the budget deficit is only 2.8 per cent of
GDP, compared with 2.6 per cent last year, there will be off-budget
increases in local government bond financing and other measures that will
boost demand. Overall, the fiscal thrust this year will probably be in the
region of 0.5-1.0 per cent of GDP.
On the monetary policy side, the official target is to keep overall
leverage in the economy unchanged this year, with total social financing
growing in line with nominal GDP (ie 9.5 per cent). However, many
independent economists think that this target will be exceeded by perhaps 2
per cent, allowing overall leverage to resume its upward trajectory, albeit
at a slower rate than seen in earlier stimulus packages. That also seems to
be the message from the latest monetary data.
Encouragingly, the latest nowcasts show that the economy has rebounded from
the severe weakening recorded towards the end of 2018, and activity is back
in line with Mr Li’s new target of 6.0-6.5 per cent growth in GDP in 2019.
Assuming that there is no return to escalating trade wars
<https://app.ft.com/content/e089b6de-42b4-11e9-b168-96a37d002cd3>, the
worst  may  be  over  for  the  Chinese  economy. 
9 days ago by gitteheij

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