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Ascertaining the truth of China’s Economic Recovery

China’s economy headed for a stall or a second coming of the bubble?

Shunsuke Kobayashi

Yota Hirono

Summary

◆The writer of this report visited China just as the curtain rose on the National People’s Congress from March11 to March 15. The writer surveyed the situation in Beijing, Xiong'an New Area, and Qingdao, and exchanged opinions with local experts. In this report we share insights gained on this research trip.

◆First of all, US-China trade friction was not a major factor in the loss of momentum in China’s economic growth in 2018. It would be more accurate to say that China was hit with tariff hikes right at a time when domestic demand was losing speed due to policy changes, thereby adding to a preexisting condition. The stalling of domestic demand can be attributed to the following: (1) strengthening of regulations regarding wealth management products, (2) putting the squeeze on infrastructure projects, (3) introduction of regulations regarding inter-individual consumer finance, and (4) suspension of tax reduction on automobile purchases. The first two items in this list have a political aspect, and once into the current year (2019) have been on the way to being relaxed somewhat. This has contributed to a turn toward recovery for the Chinese economy.

◆However, China’s domestic inventory level is high. Hence it will take time before China’s economic recovery begins to bring benefits to Japanese corporations. Meanwhile, factors (3) and (4) remain, so it is highly possible that recovery in consumption will be delayed. Therefore, it will take some time for Japanese corporations with a high dependence on Chinese consumption to recover. Possibilities are great that the pace of recovery will be relatively slow.

◆On the bright side, inventory adjustment is progressing for some Japanese corporations. For instance, electronic parts and devices saw its inventory levels increase through the middle of 2018, and then inventory adjustment progressed throughout the second half of that same year. Meanwhile, it is quite possible that the transport equipment, and electrical machinery and Information and communication electronics equipment industries have already completed adjustment of excess inventory. These industries had already reached a high level of inventory by the first half of 2018. Reduction of inventory through the adjustment process is remarkable, reaching as far as the production machinery industry. The comeback for China’s economy may very well lead to the bottoming out of Japanese corporate business results in these industries.

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