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China's economy will bounce back from a tough 2018: analysts

Krystal Hu

2018 wasn’t easy for China, as the world’s second-largest economy was going through deleveraging in its debt-ridden economy and has been caught up in a trade dispute with the U.S. The GDP growth rate fell to its lowest level in 30 years, and its domestic stock market was the worst in a decade.

Now analysts are seeing silver linings, as the Chinese government moves to implement fiscal and monetary stimulus measures to support the economy, and a trade deal with the U.S. is likely to be finalized in the coming weeks.

“China is set to be a key turnaround story this year — after having been a drag on global growth since early 2018,” analysts at BlackRock wrote in their Q2 2019 Global Investment Outlook. “We are increasingly confident that Chinese growth is likely to reaccelerate from the second quarter onward, as the credit impulse (the year-on-year change in credit growth) turns positive and fiscal stimulus gains traction.”

Some economic indicators from the first quarter are already sending some positive signals. China’s manufacturing PMI for March released on Monday came in much stronger than expected at 54.4, rising to the highest level since June 2018. Allan von Mehren, Chief Analyst at Danske Bank said the turn provides more evidence that the economy bottomed in the first quarter and a moderate recovery could be expected this year. China’s stock market (SSE), which is dominated by retail investors with high volatility, already recovered 30% year-to-date, as sentiment turns positive.

China PMI rebounds in the first quarter of 2019. (Danske Bank)

“The driver behind the improvement in the Chinese economy is likely to be easing across a range of fronts: credit easing, monetary easing, fiscal easing and easing in trade tensions,” Mehren wrote in a note. Last month, China announced to cut company taxes and employer social insurance contributions by nearly 2 trillion yuan ($298 billion), in an effort to buoy private sectors and consumption.

Analysts said a turnaround in the Chinese economy will underpin the global economy in its late cycle. But some worry that the stimulus could mean putting a stop to more long-term oriented structural reforms, including cracking down on shadow finance and deleveraging the economy.

Kate Moore, chief equity strategist at BlackRock Investment Institute, said policy easing and structural reforms aren’t mutually exclusive, and the reform will still remain a key task for the government.

“The policymakers are very focused on longer-term growth and sustainable growth at that,” Moore told Yahoo Finance’s The Ticker. “They're not looking to accelerate the pace of growth, but rather stabilize what is actually a very high level for an economy of its size.”

Krystal Hu covers technology and China for Yahoo Finance. Write to her via krystalh@yahoofinance.com

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