The Silver Lining Of A Slowing China

By Glenn Dyer | More Articles by Glenn Dyer

China has trimmed its expected growth rate for 2020 – in what is yet another example of the government reformatting its economic targets to fit a slowing pace of growth in the economy.

The government has been gradually trimming its growth targets for the coming year in the past few years as global demand has slowed and trade tensions emerged with the US.

But while that would normally be viewed as negative for Australia and commodity exporters such as iron ore miners, there seems to be the usual silver lining of higher spending on infrastructure to consider before rushing to judgment by selling shares.

The cut – to around 6% from 2019’s range of 6% to 6.5% in GDP growth in 2020 – won’t be officially announced until the usual national Peoples Congress in March but the decision is made at the end of each year by the Central Economic Work Conference.

According to Reuters, that meeting was held last week, ending on Thursday. A statement from the conference said in part:

“The country faces rising downward economic pressure amid intertwined structural, institutional and cyclical problems, according to the statement.

“The global economy continues to slow down, the world is still undergoing in-depth adjustments due to the global financial crisis, profound changes are accelerating, and sources of turbulence have substantially increased, the statement said. “We need to be well prepared with contingency plans.”

Reuters and economists said growth would rely on increased state infrastructure spending (as many governments around the world are doing) to ward off a sharper slowdown in the wider economy.

The news helped iron ore prices to end the week at $US94.61 a tonne, up 63 cents on the day, according to the Metal Bulletin’s Fastmarkets website. iron ore prices rose around 6% last week and are up 29% from the end of 2018 as we approach the conclusion of 2019 and the decade.

More talk about China’s infrastructure plans will help keep iron ore prices solid going into 2020.

“We aim to keep next year’s growth within a reasonable range, or around 6%,” Reuters reported a source who requested anonymity as saying.

Reuters pointed out that 2020 will be crucial for the ruling Communist Party to meet its goal of doubling GDP)and incomes in the decade to 2020.

Economic growth of nearly 6% next year could be enough to meet that goal given the economy is expected to expand about 6.2% this year, according to economists. The 2019 data will be issued midway through next month and ahead of the New Year holiday break starting Saturday, January 25.

Reuters reported that the central government aims to boost infrastructure investment by allowing local governments to issue more special bonds next year, but there is less room for tax cuts, the sources said.

Local governments could be allowed to issue special bonds worth some 3 trillion yuan ($426.20 billion) in 2020 to fund infrastructure projects, including 1 trillion yuan front-loaded to this year, Reuters reported.

Around 3 trillion yuan of special bonds compares to the 2.15 billion in yuan of special bonds approved for issue in 2019, so the extra spending is significant.

The annual budget deficit could rise from this year’s 2.8% of GDP, to just under 3%.

Additionally, there are expectations the central bank is likely to ease policy further to encourage lending and lower corporate funding costs, but the rate cuts will be targeted so as to avoid overheating property markets and inflation – thanks to surging pork prices over the past year or more, the consumer price index hit an annual rate of more than 4% in November (and is averaged 2.8% in the 11 months to November compared with the official target of 3.0%).

The inflation target for next year is likely to remain around 3%, but the figure to watch is the producer price index which remained negative in November and confirming the deflationary impact of weak demand on producer goods.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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