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Have fears of a slowdown in China's economy been overdone?

18 April 2019

The sharp selloff in global equity markets at the end of last year was driven by slowing global growth fears, compounded by President Trump's trade policy. As a result, China took action to shore up its economy by announcing a broad stimulus package earlier this year.

This week we have seen signs that suggest things in China may be improving. GDP growth exceeded expectations at 6.4% and trade has been on the rise with exports up 21.3% year on year in yuan terms. Industrial output was higher than expected, up 8.5% on the year. China's stock market is up over 30% this year, possibly pricing in some of the better economic news already.

We should remain cautious in taking a single set of numbers as a sign of a longer-term shift in the economy. Historically, economic data in February and March has been distorted by the effects of Chinese New Year, so we will need to see if this improved data continues in months to come. Much of the economic boost appears to have come from increased government spending and tax cuts. The transmission mechanism of these measures means we are yet to see the full impact of the broad stimulus package. In the short-term China may have boosted growth, however the longer-term trajectory points towards convergence to levels seen across the developed world. The aging population, a result of the now defunct one child policy, will make it harder for the economy to continue to grow as fast as it has done so previously. In addition, China's economy has been transitioning towards consumption rather than production, which requires less investment than in the past.  

A US-China trade deal is expected to be finalised soon. The degree to which tariffs are lifted will have an impact on Chinese exports to the US, but for now, China is seeing growth in exports to other markets. If the deal involves China accepting more goods from the US, this may result in less imports from other markets.

As it stands, an improved economy and an increase in exports to other countries has strengthened China's hand in their new trade deal negotiations. China appears to be less desperate to do a deal than some US officials have suggested. Thus, the combination of the stimulus package and potentially fewer obstacles for US-China trade, should see China's economy remain in good shape over the coming months.  

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