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China stimulus to offer respite from slowdown in second half of 2019

Economists see growth falling to 6.2% in first quarter before temporary bounce

HONG KONG -- China's economy is expected to bottom out in the second half of this year, thanks to aggressive stimulus measures by Beijing, a new survey of economists based in the country shows.

The pickup, however, will not mean the end of the country's gradual slowdown, the experts agree.

The average projection for China's real gross domestic product growth in the first quarter of 2019 was 6.2%, among economists polled by Nikkei and Nikkei Quick News. The would mark the fourth straight quarterly decline and the slowest pace of expansion since 1992.

"China should continue to slow down due to the trade war, the global slowdown and debt issues," said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets.

Kenny Wen, wealth management strategist at Everbright Sun Hung Kai, said both economic and financial cycles have become stagnant in China, illustrated by a steep decline in electricity consumption in the first two months of 2019 and a forecast that annual exports will rise only 4.5%.

Many of the economists, though, anticipate a second-half boost from Beijing's bold tax cuts and infrastructure investments.

The government told the National People's Congress in March that it would deliver about 2 trillion yuan ($297.6 billion) worth of cuts to taxes and social insurance premiums, in addition to infrastructure spending and other stimulus efforts.

Shen Jianguang, economist at JD Digits, estimates the measures will push up GDP by 0.2 to 0.3 of a percentage point, and said it bears watching whether the policies reverse weaker consumption and manufacturing.

Xia Le, chief economist for Asia at BBVA, said the government's measures will spur the GDP by 0.2 of a point, since wealth effects will encourage consumption while the reduced burden on companies will stimulate investment and brighten market sentiment.

Some are taking a more cautious view. Aidan Yao, senior emerging Asia economist at AXA Investment Managers, questioned whether the tax cuts will directly contribute to GDP growth. "Tax cuts can only boost growth if they are spent," he said. "But if they are saved, which is more likely in an economic downturn, the net impact on growth will be smaller."

Still, of the 15 economists polled, 12 predicted the economy will bottom out in the second half of 2019 or, more specifically, in the July-September period.

Sean Taylor, chief investment officer for the Asia-Pacific region at DWS, said, "For 2019, we expect China's growth to stabilize in the middle of the year with potential recovery in 2H2019, with the help of loose monetary and fiscal policy."

Fan Xiaochen, director at MUFG Bank, agreed that the effects of fiscal and monetary policies, plus tax cuts, will begin to show up in the second half.

Even so, they think China's moderate slowdown will continue in the coming years. The average growth projection was 6.3% for 2019, 6.1% for 2020 and 6% for 2021.

"The working-age population is shrinking. Easy productivity gains have already been made," said Richard Jerram, chief economist at Bank of Singapore.

David Rees, emerging market strategist at J. Safra Sarasin, observed: "The most important thing going forward is that the government continues to pursue structural reforms to wean the economy of its addiction to investment-led, debt-fueled growth. Otherwise, these 'hard landing' stories will continue to emerge every two to three years."

The experts do see hope for the U.S. and China to ease their trade tensions. Asked about their expectations for the conflict a year from now, 10 economists said the situation will improve by then, while four said it would remain unchanged. None predicted more intense friction.

Though the question was only included in the survey in July 2018, this is the first time a majority of the respondents pointed to an improvement. Ken Chen, Chinese economy analyst at KGI Asia, said the bilateral trade talks are going smoothly and the tensions will ease as the 2020 U.S. presidential election approaches.

Yet the situation remains fluid. To a multiple-choice question on risks that could cause an economic double dip in China, 10 of the 15 economists picked the U.S.-China trade negotiations. Many also mentioned stagnant consumer spending and a liquidity crunch in the corporate sector.

"The longer the U.S.-China negotiations drag on, the more time will be needed before a pickup in consumption and investment sentiments, due to the continuation of the uncertain outlook," said Mihoko Hosokawa, research executive at Mizuho Bank (China).

The economists who responded to the survey are: Arjen van Dijkhuizen, Senior Economist, ABN AMRO Bank; Aidan Yao, Senior Emerging Asia Economist, AXA Investment Managers; Richard Jerram, Chief Economist, Bank of Singapore; Xia Le, Chief Economist for Asia, BBVA; Xie Yaxuan, Chief Economist, China Merchants Securities; Li-Gang Liu, Chief China Economist, Citigroup Global Markets Asia; Kevin Lai, Chief Economist, Asia ex-Japan, Daiwa Capital Markets; Chris Leung, Chief China Economist, Group Research, DBS Bank; Sean Taylor, Chief Investment Officer, Asia Pacific, DWS; Kenny Wen, Wealth Management Strategist, Everbright Sun Hung Kai; Brian Coulton, Chief Economist, Fitch Ratings; Thomas Shik, Chief Economist, Head of Economic Research, Hang Seng Bank; Qu Hongbin, Chief China Economist, HSBC; Cheng Shi, Chief Economist, ICBCI; Iris Pang, Greater China Economist, ING Bank; Shen Jianguang, Chief Economist, JD Digits; David Rees, Emerging Market Strategist, J. Safra Sarasin; 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; Ting Lu, Chief China Economist, Nomura; and Wang Tao, Head of China Economic Research, UBS.

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