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China faces economic challenges in 2019
December 31, 2018, 10:03 am

China has warned the US not to adapt protectionist measures to global trade [Image: Archives]

Chinese industrial profits have dropped for the first time in three years, according to the National Bureau of Statistics (NBS).

The NBS also said that the manufacturing Purchasing Managers’ Index (PMI), its survey tracking the health of some 3,000 large and state-owned companies, fell to 49.4 per cent in December.

The reading is below the neutral 50-point level, signalling a contraction in the manufacturing sector.

But despite the negative data, local economists say that the outlook for 2019 is positive.

They say that despite strains brought on by the trade dispute with the US and dropping domestic consumer demand, the economy managed to grow 6.7 per cent for most of 2018, meeting the government’s target of 6.5 per cent growth this year. However, it was hindered by the ongoing trade war with the US in the fourth quarter.

Economists expect that the overall GDP growth in 2018 to be at 6.6 per cent. The World Bank says economic growth in 2018 will peak at 6.5 per cent and fall to 6.2 per cent in 2019.

But there are risks. If China and the US cannot reach a deal within the three-month deadline announced by US President Donald Trump in early December, the manufacturing sector is likely to take a hit, further pushing downward on industrial profits.

In early December, China and the US agreed to delay additional tariffs as they work on negotiating a trade agreement within 90 days.

Nevertheless, Chinese officials say the economy is stable.

They point to a report from the Chinese Academy of Social Sciences which said that domestic consumption will contribute more than 78 per cent to economic growth, the highest such contribution in 18 years. The International Monetary Fund (IMF) agrees that consumpution is the key economic driver for China, especially in the face of US tariffs on Chinese manufactured goods.

Meanwhile, the People’s Bank of China (PBOC) published a report which indicated that financial risks have subsided as tough regulations were implemented to deal with high corporate and shadow banking risks.

“Current financial risks have generally retreated, and initial success has been achieved in amending financial dysfunction,” the report said.

But it is China’s trade war with the US that has most global forecasters worried.

The trade dispute has impacted global growth, particularly damaging business confidence and investment in Asia, the IMF warned last week. Asian GDP growth for 2019 was cut from 5.6 to 5.4 per cent, the IMF said in early December.

Global growth forecasts were cut from 3.9 to 3.7 percent in October, and the IMF warns that unless China and the US reach an agreement, the predictions could be cut further next month.

Most global economists say that lowering trade barriers will open up China’s economy and improve its standing, particularly in the trade spat. Others say that China should also take measures to strengthen its intellectual property laws.

Chinese leaders say they are willing to work with the US and to open their markets, but they say that continued US pressure and harassment of its executives restricts their flexibility.

This comes after the Chinese may have gotten a boost of confidence from Trump who Tweeted that “big progress” was being made in negotiations to resolve the trade dispute.

By Firas Al-Atraqchi with inputs from Agencies

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