Can China ever record economic growth greater than 6%?
We don’t know, but if I were a betting man I’d say not.
After contracting some 6.8% in the first quarter of this year, estimates vary with respect to what China’s GDP growth will be for 2020 in total. CRU expects between 2-3%, according to a Financial Times article, but analysts polled by the South China Morning Post are quoting between 1.5-2.5%, with some major banks, like UBS, expecting growth at the bottom of that range.
What’s prompted the low numbers, apart from an appreciation of the dire consequences of the pandemic on the economy in the first quarter, is Premier Li Keqiang’s announcement last week to the National People’s Congress of a Rmb 6.1 trillion ($853 billion) stimulus package to stabilize the economy following the coronavirus disruptions.
That is equivalent to 6.1% of nominal gross domestic product, well below the level following the 2008 financial crisis.
But it is not just the scale of the stimulus that has disappointed markets — it is the nature and targeting.
The 2009 stimulus was mainly in the form of direct government spending on infrastructure and support for the housing market. This time, it is far more nuanced and cannily focussed on medium-term goals to boost science and technology.
According to the Financial Times, the package includes an Rmb 2.5 trillion cut in taxes and expenses, a Rmb 3.75 trillion quota for local government special bond issuance — an increase of Rmb 1.6 trillion over last year — and an Rmb 1 trillion issuance of government bonds for COVID-19 control. The Financial Times reports the deficit-to-GDP target was increased to a modest 3.6%, still crossing the previous informal rule of keeping it below 3%.
Beijing also abandoned its 6% growth target for 2020, signaling acceptance that growth in 2020 will be well below 6% — a level the economy may never breach again as it enters a more mature phase of growth.
Both stock and metal markets fell on the news. Beijing sought to reassure markets, saying not all the details have been released yet, thus hinting further steps could be taken.
But what is clear is there will be three areas prioritized for spending: new infrastructure, new urbanization and “other big projects.” New infrastructure includes building next-generation information networks, 5G applications and charging facilities for new energy vehicles.
New urbanization captures the upgrade of public facilities, including the renovation of 39,000 old urban residential communities and installation of elevators in residential buildings. While big-spending projects include improved water conservation and transport, with a modest Rmb 100 billion earmarked for national railways. As such, any increase to steel and aluminum demand is likely to be minor; only copper is being seen as a beneficiary because of the increase in communication, electrical and electrification facilities.
Perversely any pronounced increase U.S.-China trade tensions may actually be supportive for metals as it is widely expected Beijing is holding in reserve supportive measures in the event the economy takes a hit from further sanctions or an escalation of tariffs.
Such stimulus may well be of a more conventional sugar rush boost to the manufacturing and construction sector. However, as past stimulus of this nature has added to unproductive infrastructure and wasteful resource allocation, Beijing will be unwilling to release such measures unless they feel they have no alternative with concerns rising over the impact on employment, already hammered by the pandemic, in the face of new trade action.