China must turn to Plan B as trade war escalates, and spur the domestic economy
David Brown says the potential damage that America’s trade war can wreak on China is no doubt giving Chinese planners sleepless nights, but now is the time to batten down the hatches and shift their focus to shoring up consumer confidence
With trade disputes, currency spats, monetary uncertainty and a wavering world recovery, a perfect storm is brewing. That’s bad news for a global economy in desperate need of a solid spell of uninterrupted growth.
With dark clouds looming, China stands in harm’s way with its economic growth plans at risk of being blown off course. Beijing must batten down the hatches and prepare for all possible contingencies. China’s economy could be in for a bumpy ride in the second half of the year.
Set against these kinds of numbers, Beijing’s 2018 target for economic growth at around 6.5 per cent seemed a reasonable bet as long as favourable headwinds prevailed. Free-flowing world trade, good geopolitical stability, a sound policy environment and improving economic confidence might have seemed fair assumptions when the forecasts were first made, but recent events have thrown it all in the air. Fears about a global trade war may be giving China’s planners some sleepless nights.
If Washington raises the stakes in the dispute with tougher trade sanctions and a whispering campaign for a weaker dollar, Chinese output, investment and jobs are at risk. Consumer, business and investor confidence could all end up on the defensive, potentially putting a deep dent in China’s future growth potential. This year’s 6.5 per cent growth target is less at risk, but expectations for next year could end up seriously downgraded. That’s not what the government wants.
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A slowdown on the consumer side could be compounded by China’s corporate sector if companies respond to weaker export demand by cutting back on output, investment and new hiring intentions. The multiplier effects spreading across the economy would be severe, leaving overall demand at a much weaker level than anticipated and the country’s planners at a loss.
Beijing needs a Plan B to deal with any potential fallout. If relations with Washington deteriorate any further and the trade war escalates, China’s policymakers will need to step up their game, making up for any shortfall in demand. One thing is very clear, monetary conditions must be kept loose for as long as possible to boost domestic reflation hopes.
China must maintain strong growth momentum and the trade war is a golden opportunity to place greater conviction on domestic economic strengths. It’s not a total disaster.
David Brown is chief executive of New View Economics