(The opinions expressed here are those of the author, a columnist for Reuters.)
* GRAPHIC: China's economy and trade: tmsnrt.rs/2iO9Q6a
By Clyde Russell
LAUNCESTON, Australia, Nov 21 (Reuters) - There is some cognitive dissonance at work when it comes to China’s economy. The market believes that 6% growth is a line in the sand for Beijing and GDP cannot be allowed to go below that, but at the same time everybody knows that at some point it will.
Holding both these views simultaneously means that investors and China analysts can be both bullish that the government will continue to stimulate the economy, but also bearish that at some point Beijing will lack the ability to provide enough stimulus to keep gross domestic product growth above 6%.
The debate should be just how soon will China “allow” GDP to drop below the psychological 6% level, and when this happens, will it make much of a difference in the real world?
China’s GDP growth slipped to 6.0% year-on-year in the third quarter, down from 6.2% in the second, and the softest outcome since the first quarter of 1992.
Much of the blame has been put on the ongoing trade dispute with the United States, but there was also evidence that the economy was losing steam before the tit-for-tat tariffs started in earnest in the middle of last year.
Given that even the partial, so-called Phase 1, resolution of the trade dispute seems to be a 50-50 bet currently, it’s likely that the Chinese economy will continue to labour under the weight of the tariff war with the United States for some time to come.
This may make it inevitable that GDP growth drops below 6%, but this could actually be a blessing for the authorities in Beijing.
They have a perfect excuse as to why GDP growth has dropped, and can use their control of the domestic media to hammer home a message that weaker growth is all the fault of U.S. President Donald Trump.
In some ways it would probably come as a giant relief for Beijing to finally acknowledge weaker growth.
There are several analysts who believe that Chinese GDP figures are optimistic and massaged to convey the wishes of the ruling Communist Party, and that growth is already below 6%.
Be that as it may, an official acknowledgment of slower growth probably wouldn’t be a disaster for the Chinese economy, or those economies highly leveraged to China, such as major commodity exporter Australia.
The value of Chinese GDP was about $13.26 trillion in 2018, compared with just $2.74 trillion in 2000 and $7.48 trillion in 2010.
In 2010, China’s GDP grew 10.6%, or $690 billion. However, while GDP growth in 2018 was 6.6%, the dollar value was $820 billion.
In other words, even though the rate of growth has slowed dramatically, the value of that growth is still higher given the base effects of a larger economy.
It’s also for this reason that despite the slower GDP growth and the drag from the trade war, China’s imports of major commodities have been resilient so far in 2019.
Crude oil is the standout, with imports in the first 10 months up 10.5% from the same period a year earlier, according to customs data.
Natural gas imports were up 7.9% and coal by 9.6%, completing a trifecta of strength in the energy sector.
However, imports of industrial metals were somewhat weaker, with unwrought copper down 10%, although imports of ores and concentrates were up 8.3% as China increases its domestic copper smelting capacity.
Iron ore imports were down 1.6% in the first 10 months, although this is mainly a supply-driven issue after a fatal dam burst in number two shipper Brazil idled mines and a tropical cyclone in top exporter Australia crimped exports.
The point is that slower economic growth in China doesn’t necessarily translate into weaker demand for commodities, as long as the rate of slowing doesn’t result in too big an easing in the rate at which the dollar value of GDP expands.
The trade war with the United States is an economic issue for China, but in the spirit of never wasting a good crisis, Beijing should consider using the opportunity to recalibrate market expectations for economic growth, or be forced to do so anyway at a time not of their choosing. (Editing by Richard Pullin)