China’s economy may slow after robust growth in 1Q18 (Business Brief No.3736)

In KResearch’s view, China’s economy may slow over the remainder of 2018, along with exports that will likely weaken as well, amid full-year growth that is expected to reach 6.6 percent YoY. Because accelerated shipments were already transacted before the effectiveness of new tariff rates per Section 301 of the US’s Trade Act of 1974 at the end of 2Q18, impacts of those increased tariffs would not be very serious.  Also, key Chinese products, e.g., mobile phones and PCBs, are not included in the new taxation. Therefore, China’s outward trade in 2018 should still expand, given an up-cycle in global electronics business. However, with demand now weakening and a high 2017 base, this leads KResearch to project slower growth in China’s 2018 exports at perhaps 4.5-5.5 percent YoY, versus the 7.9-percent pace in 2017, assuming that trade disputes between the two countries do not escalate and a satisfactory conclusion can be reached within 2H18.

Meanwhile, China’s central bank recently announced a cut of 1 percent in their reserve requirement ratio for commercial banks (RRR) to help promote SMEs, while also contributing to higher liquidity that would cushion future risks. This RRR cut is not aimed at stimulating the overall economy and will likely not create any greater risk in corporate debts, due to stricter loan underwriting criteria required for them by the authorities. In addition, the lower RRR is also, in part, a replacement for their CNY900 billion medium-term lending facility to the banking sector that will be due at the end of April 2018.

Risks to be watched over the rest of this year include those mainly related to international trade. The US is considering the inclusion of more Chinese products into their list of goods to be subject to higher tariffs – and that might total around USD100 billion in export trade – in retaliation for China’s stated intent to impose a 25-percent tariff on US imports; such action would likely put more pressure on China’s economy. Nevertheless, KResearch maintains the view that China and the US may be able to find an amicable solution to the US’s Section 301 measures that could minimize its negative impacts and in turn limit damage to their economies. If they accomplish this, global trade would thus be gradually revived and a trade war between the two countries would be less likely to arise.