China’s growth outlook cut by World Bank as US trade war continues to weigh on economy

The World Bank has joined the parade of international organisations and market institutions cutting their forecasts for China’s growth rates for 2019 and 2020 as trade tensions with the United States show no signs of abating and threaten to spill into the finance, technology and even entertainment sectors.

The Washington-based agency on Thursday cut China’s 2019 economic growth forecast to 6.1 per cent, down 0.1 percentage point from its previous estimate in April, reflecting rising structural constraints and “less benign external conditions”. The new growth forecast is just above the bottom-end of the Chinese government’s growth target range of 6 to 6.5 per cent for this year.

It also slashed the headline growth forecast for next year by 0.3 percentage points to 5.9 per cent as a result of ripple effects. The initial forecast for Chinese growth in 2021 projects the economy to slow slightly further to 5.8 per cent.

The World Bank also cut its growth forecasts for nearly all Asian and Pacific economies this year, including a cut of 1.1 percentage points for Thailand and a 0.6 percentage point reduction for Philippines as trade tensions and global uncertainties have intensified.

Downside risks to the [economic] outlook are high, stemming from a further escalation of China-US trade tensions and a weaker than expected global outlook,

World Bank report

“Downside risks to the [economic] outlook are high, stemming from a further escalation of China-US trade tensions and a weaker than expected global outlook,” the World Bank said in its report.

While the direct economic impact of the trade war is expected to be manageable, the indirect effects on consumer and business confidence could be larger than currently expected, it warned.

“A protracted period of high uncertainty and continuing deterioration in China’s access to foreign markets could lead to a shift of global value chains to other countries and a much more significant and longer-term adverse impact on investment,” the World Bank added.

The publication of the World Bank’s new forecasts came as a top-level Chinese delegation led by Vice-Premier Liu He is due to meet their American counterparts later on Thursday in Washington for a new round of talks in hopes of easing trade tensions.

The outlook for the talks, though, are clouded by the US decision on Monday to place eight Chinese technology firms and 20 others institutions on a trade blacklist, as well as the impact of a controversial comment by Houston Rockets general manager Daryl Morey regarding the anti-government protests in Hong Kong.

The World Bank also warned Chinese policymakers that their reliance on additional credit to support growth may worsen domestic risks by adding more leverage to the already highly-leveraged corporate and household sectors.

Additional monetary stimulus should be undertaken in a way that does not reverse the success of the government’s campaign to limit financial risks, while fiscal stimulus could target higher and more efficient spending on health, education, and social protection which in turn would help boost private consumption, it suggested.

“Given heightened external risks, China’s medium-term growth will depend even more on deepening supply side reforms to raise productivity growth, including through an increased role of markets, competition and the private sector,” the bank said.

China has already rolled out a 2 trillion yuan (US$280 billion) business tax cut package this year to help the domestic market to offset external losses. Gross domestic product growth (GDP), though, still dropped to a 27-year low of 6.2 per cent in the second quarter and is expected to drop further without increased policy support.

Larger policy fine-tuning may be seen if third quarter GDP figures, due next week, prove disappointing.

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