ECONOMICS Bloomberg Businessweek March 11, 201928
The budget deficit target for 2019 was raised to
2.8 percent of gross domestic product, from last
year’s goal of 2.6 percent. “It’s a big fiscal push,”
says Michael Spencer, global head of economics at
Deutsche Bank AG. “There’s a reluctance to just turn
on the infrastructure tap if they don’t need to.”
Li warned that China faces a more complicated
economic environment this year. Despite reports
that the U.S. and China are on the verge of announc-
ing an armistice in their trade war, U.S. tariffs on
$250 billion in Chinese imports may not be lifted all
at once. Some of the pressures Chinese businesses
face are homegrown. Many complain they’ve been
unable to borrow since the government began a
crackdown on so-called shadow banking in 2017.
Policymakers have taken steps to boost the amount
of credit available by lowering the amount of money
banks must set aside as reserves and by prodding
institutions to make more loans. However, with
China’s total debt approaching 300 percent of GDP,
they’re loath to completely open the spigot.
How smoothly the world’s No. 2 economy nego-
tiates its challenges has big implications for the rest
of the world. With Europe’s growth sputtering and
the longevity of the U.S. expansion under question,
a more severe Chinese downturn would be bad
news for the global economy and spell trouble for
the Asian nations integrated into its supply chain.
For now, policymakers are focused on managing
the nation’s long deceleration from the double-digit
growth rates of the early 2000s. Economists sur-
veyed by Bloomberg see output growth slowing
to 6.2 percent this year, from 6.6 percent in 2018,
before easing further in 2020 and 2021.
Li’s report promised a “noticeable decrease” in
the tax burdens of major industries. In a move that
benefits the manufacturing sector, the top bracket
of the value-added tax, now set at 16 percent, will
be lowered by 3 percentage points, while the 10 per-
cent bracket will be cut by one point. Combined,
the VAT reductions add up to as much as 800 billion
yuan and will boost corporate earnings, according
to Morgan Stanley.
Li’s blueprint set a goal of keeping China’s lever-
age ratio “basically stable” in 2019—something
many believe is impossible. Pauline Loong, manag-
ing director at research firm Asia-Analytica in Hong
Kong, says the message she took away from Li’s pre-
sentation is that deleveraging is “definitely out.”
Recent data show that, from bank lending to
margin-trading accounts at stock brokerages, lever-
age in China is rising almost everywhere. Bank
loans jumped by a record amount in January, and
off-balance-sheet financing rose for the first time
in 11 months.THE BOTTOM LINE Despite tax cuts and measures to unlock
credit, Chinese officials see economic growth slowing this year,
possibly to as low as 6 percent.○ Three months into the Mexican leader’s
presidency, investors still regard him warilyMexican President Andrés Manuel López Obrador,
or AMLO as he’s known, is doing spectacularly well
with voters 100 days into his term. The latest sur-
vey pegs his approval rating at 78 percent, a record
for the first trimester of a presidential term since
polling began in the 1980s.
But just as his popularity is soaring, market
sentiment is souring, widening a divide between
investors and the president’s base. The clearest
sign of this is a substantial markdown in growth
forecasts by Wall Street analysts. In a poll of insti-
tutional investors commissioned by Credit Suisse
Group AG in February, three-quarters said theCan Business
Learn to
Trust AMLO?
Unlike in previous years, Li’s report set no tar-
gets for retail sales growth or fixed-asset invest-
ment. Officials reiterated that monetary policy will
remain “prudent” while presaging further cuts to
the required reserve ratio for smaller banks.
Negotiators from the U.S. and China are said to be
close to completing a trade deal that could lift most
or all U.S. tariffs as long as Beijing follows through on
pledges to bolster protections for intellectual prop-
erty rights and increase its purchases of American
products. That would remove one cloud hanging
over the economy, leaving Xi with a lesser need to
use stimulus to support growth.
“The government’s quest to create more sus-
tainable growth by reducing financial risks has
not been abandoned, but it will be a slow jour-
ney,” says Katrina Ell, an economist with Moody’s
Analytics in Sydney. “It remains to be seen
whether confidence will remain in Beijing’s abil-
ity to do this given the less aggressive path it is tak-
ing.” —Bloomberg News○ Li