Sino File | China must open its markets to weather Trump’s trade war

When it comes to the Chinese economy, Beijing has always faced a choice between short-term economic stabilisation and long-term growth. Or, in other words, between government intervention and market liberalisation.

The October 31 Politburo communique emphasised efforts to arrest the economic slowdown and market woes, while providing some pro-market boosters in the form of cutting tax, reducing red tape, and relaxing constraints on the private sector. In the previous Politburo meeting in late July, the top decision-making body emphasised stable monetary policy and maintaining a strong grip on the floodgates to the country’s money supply. But the latest Politburo statement shifted policy focus to short-term stabilisation, as all recent data has pointed to a deteriorating growth outlook for the world’s second-largest economy.

Real GDP growth slowed to 6.5 per cent in the third quarter, from the first quarter’s 6.8 per cent and second quarter’s 6.7 per cent. It is also the lowest quarterly rate since 2009. September’s reading of industrial production growth slowed to 5.8 per cent, from August’s 6.1 per cent – the first time growth has sunk below 6 per cent since 2015. October business confidence in both manufacturing and the service sector fell as indicated by the slide in the official Purchasing Managers Index.

A series of tit-for-tat measures, with more than US$250 billion worth of Chinese exports to the US subject to punitive tariffs of up to 25 per cent, and some US$110 billion worth of American exports to China subject to reciprocal taxes, will put a further drag on China’s already slowing economic growth. It is inevitable that companies that export to the US market will reduce production. Worse, they could consider relocating their production lines from China to other countries. The simmering trade war will also dampen investors’ appetite and confidence about investing in China.

Beijing reacted to previous global economic crises in 1998 and 2008 with massive stimulus that kept growth humming despite a fall-off in external demand. While few economists expect the repetition of such mega-stimulus, the government has relaxed macro policies across the board, cutting the reserve requirement ratio for commercial banks three times to increase liquidity, approving more bond issuance by local governments, and easing financial regulation.