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China GDP likely to slow to 6.1% in July-Sept: survey

Median estimate forecasts lowest quarterly growth since 1992

HONG KONG -- China's real gross domestic product for the July-September quarter has continued to slow, to 6.1% on the year, dragged down by sagging exports and production, according to the average forecast of economists surveyed by Nikkei and Nikkei Quick News.

The prolonged trade war with the U.S., worsening cash-flow problems of businesses and a mountain of local government debt are beginning to put downward pressure on the economy.

Economists had expected China's economy to grow at 5.8% to 6.4% in the July-September quarter. The median estimate of 6.1% was the lowest quarterly growth rate since 1992, when comparable data became available.

China's economy has slowed mainly due to the prolonged trade row with the U.S. The administration of President Donald Trump imposed the fourth round of tariffs against China in September. Cheng Shi, chief economist at ICBCI, said the momentum of investment and production has continued to slow, adding that manufacturers might accelerate shifting of production overseas.

Shen Jianguang, chief economist at JD Digits, said exports that are affected by U.S. tariffs and tighter controls on properties are adding greater downward pressure on the economy.

China's economy was expected to grow at 6.2% in 2019, and 6.0% in 2020 and 2021.

The Chinese Communist Party aims to double GDP in 2020 compared with the figure in 2010. To achieve the goal, China's economy will need to grow at 6.2% on average in 2019 and 2020. But eight out of the 20 economists responded that the Chinese economy will only grow in the 5% range in 2020.

The focus will be how much stimulus measures will be able to offset downward pressure on the economy. Jian Chang, chief China economist at Barclays, said, "We think bringing forward the 2020 quota of local government special bonds will support infrastructure investment."

Fan Xiaochen, director at MUFG Bank, said there is plenty of room for fiscal policy, including support for private companies by cutting value-added taxes and commissions.

Many economists expect that the People's Bank of China will cut the new loan prime rate in stages. Mihoko Hosokawa, research executive of Mizuho Bank (China), predicted that the PBOC will slash the LPR once in a month or two.

Ken Chen, a Chinese economy analyst at KGI Asia, said lowering the LPR will lead to a gradual decline in lending rates and help the impact of monetary policy transmit more efficiency. In the short term, however, the impact of the maneuver may be limited because "the new LPR is only for new loans," said Sean Taylor, DWS's chief investment officer for Asia Pacific.

Many analysts cited retaliatory tariffs on Chinese goods and sanctions on Chinese businesses by the U.S., the deteriorating financial position of Chinese businesses and heavy debts burdening Chinese local governments as key factors that may increase the risk of further slowdown. Mizuho's Hosokawa said some of China's local governments have disproportionately large bond issuances relative to GDP or amounts of their respective infrastructure spending.

Commenting on the U.S.-China talks set to resume Thursday, Tetsuji Sano, chief Asia economist of Sumitomo Mitsui Asset Management, said: "I think the Chinese government won't give concessions because of growth concerns. The countries are unlikely to reach an agreement if the U.S. meddles with Chinese structural issues."

On the other hand, Liao Qun, chief economist at CITIC Bank International, said reaching an agreement with China is not a bad option for Trump, who is mindful of the impact of trade friction ahead of the 2020 U.S. presidential election.

China celebrated the 70th anniversary of its foundation on Oct. 1. It targets an average annual GDP growth rate of 5.3% over the next decade, but many analysts believe growth will be dragged down by the accelerating aging of the country's population.

"We expect China's gradual slowdown to continue in the coming decade. We expect growth to average around 5% in 2020-2029, falling from around 6% in early 2020 to around 4% in 2029," said Arjen van Dijkhuizen, senior economist of ABN AMRO Bank.

He cited "escalation of trade, tech, security, military and other tensions with the U.S." as the most important of a variety of downside risks the Chinese economy faces.

Growth rate for Hong Kong, where pro-democracy protests continue, was estimated at 0.3% for 2019 and 1% for 2020, falling sharply from the 3% logged in 2018. ICBCI and Morgan Stanley forecast a negative growth.

Kevin Lai, Daiwa Capital Markets' chief economist of Asia excluding Japan, said the protests are hurting Hong Kong's retail sales and inbound tourism.

"If the government chooses to toughen its stance towards the protesters, the negative economic impact would be multiplied as a result of economic sanctions imposed on Hong Kong," Lai said. "There is also the risk of capital outflows and brain drain in the longer run."

Economists who responded to survey: Arjen van Dijkhuizen, senior economist, ABN Amro Bank; Jian Chang, chief China economist, Barclays Asia Pacific; Chen Xingdong, chief China economist, BNP Paribas; Xie Yaxuan, chief economist, China Merchants Securities; Qun Liao, chief economist, Citic Bank International; Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets; Sean Taylor, chief investment officer, Asia Pacific, DWS; Thomas Shik, chief economist, head of economic research, Hang Seng Bank; Qu Hongbin, chief China economist, HSBC; Cheng Shi, chief economist, ICBCI; Shen Jianguang, chief economist, JD Digits; David Rees, emerging market strategist, J. Safra Sarasin; Sophie Altermatt, economist, Julius Baer; Ken Chen, Chinese economy analyst, KGI Asia Limited; Larry Hu, head of China economics, Macquarie; Mihoko Hosokawa, research executive, Mizuho Bank (China); Veasna Kong, economist, Moody's Analytics; Robin Xing, chief China economist, Morgan Stanley; Fan Xiaochen, director, MUFG Bank; Tetsuji Sano, chief Asia economist, Sumitomo Mitsui Asset Management; and Tao Wang, head of China economic research, UBS.

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