Growth in China is expected to be moderate in the next two years as global growth slows down and trade tensions with the US put pressure on trade and investment, according to the Asian Development Bank (ADB).
In its Asian Development Outlook (ADO) 2019, ADB expects gross domestic product (GDP) growth for the world’s second largest economy to slow to 6.3% in 2019 and 6.1% in 2020. That is below the 6.6% growth rate recorded in 2018.
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The main risk to China’s growth outlook is the potential intensification of the trade conflict with the US, which would damage investor and consumer sentiment. Domestic downside risks include policymakers seeing measures to stabilize growth as insufficient, abandoning efforts to stabilize local lending, or loosening restrictions on shadow banking, and enabling debt from non-bank financing to balloon.
ADB Chief Economist Mr. Yasuyuki Sawada, said:
The PRC economy remains strong despite the growth slowdown in recent years. Although the slowing trend will likely persist if the trade uncertainty continues, favorable fiscal reforms at the start of the year, particularly on personal income tax and social security, will help alleviate the adverse effects of anticipated weaker wage growth and boost domestic consumption
The report highlights the need to reform social security contributions as a key policy challenge for China. To address this, the report suggests the government to tackle under-reporting of pension contributions, inefficient collection of social security contributions, and legacy costs from obligations to retirees who became eligible for state pensions when the pension system was changed in 1997.
In addition, consumption will still be the main driver of growth in China in the future, but it is expected to slow slightly as household income growth decreases. However, a gradual loosening of local housing market restrictions in 2019 will advance property-related consumer spending and support retail sales in the latter part of this year and the next. In 2018, consumption contributed 5% to the country’s GDP, while household consumption expenditure grew by 6.2%.
Moreover, the outlook for China’s labor market is less robust. ADO 2019 notes that slower consumption and foreign investment due to the ongoing trade tensions will affect demand for low-skilled and blue-collar workers. The unemployment rate in the country increased to 5.3% in February 2019 from 4.9% in December 2018.
Finally, consumer price inflation will remain at 1.9% in 2019 and 1.8% in 2020 on the back of declining domestic growth, lower global oil prices, a stable Chinese renminbi against the US dollar, and lower producer prices.
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