China braces for tough second half of 2019 as it increases focus on domestic economy in escalating trade war

Manufacturing activity, industrial profits, car sales, exports and gross domestic product growth have all suffered in part due to the US trade war

China’s top leadership has rejected massive stimulus, instead opting to continue targeted support and reliance on consumer spending to help stabilise growth

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China’s purchasing managers’ index showed that manufacturing industry activity continued to contract in July. Photo: Reuters

Published: 6:00am, 2 Aug 2019Updated: 12:00pm, 2 Aug 2019

Bracing for more expected economic headwinds in the second half of the year, Chinese officials from across the spectrum have stepped up their focus to play up the potential strength of the domestic economy to counter increasing downward pressure on growth indicated by a series of recent negative indicators.

Stakes are raised further after US President Donald Trump announced Thursday he would impose a new 10 per cent tariff on US$300 billion worth of Chinese imports that will take effect on September 1, escalating the trade war and breaking the ceasefire that had been in place only five weeks since his meeting with his Chinese counterpart, Xi Jinping.

In the quarterly economic meeting of China’s top leadership chaired by Xi on Tuesday, the Politburo urged officials to raise their sense of “anxiety awareness” and understand the new challenges and increasing downward pressure on the domestic economy to turn a “crisis into opportunity”.

The Politburo again rejected the use of the large-scale stimulus employed after the global financial crisis a decade ago, instead opting to continue pushing targeted help for specific areas of the economy. It also firmly rejected the idea of easing its restrictions on the housing market to boost activity, instead maintaining its fight to contain price growth.

“On macro policy, signals from the Politburo meeting held this week were largely in line with our expectations,” said economists from JP Morgan, who predicted China will continue its pro-growth policy into the second half of 2019.

This would include targeted fiscal support for selected infrastructure projects, incentives for consumption of cars and home appliances, further implementation of already announced tax cuts, as well as an increase in liquidity so that banks have more to lend to companies, according to the JP Morgan economists.

ING’s Greater China economist Iris Pang attributed the current economic weakness to the impact of the trade war with the United States, which has affected production in China and other economies, and the technology war that has hurt China’s exports, as mechanical and electronic products accounted for at least 55 per cent of all exports in the first half of the year.

“And these cannot be cured immediately. The [trade] negotiations take time,” Pang said. “To fill the gap of the damages of the trade and tech war, the Chinese government has pushed forward planned infrastructure projects. This could give support to the economy for a couple of years.”