China concerned trade and debt risk may curb economic growth

China’s leaders are giving their strongest signal since 2015 that growth in the world’s second-largest economy could slow -- and that they’re prepared to tweak policy if trade or financial risks threaten a sharp deceleration.

Hard work is needed to meet this year’s economic targets amid an increasingly complicated geopolitical situation, according to a statement released by state media Monday following a Politburo meeting led by President Xi Jinping. Though growth remained robust in the first quarter, forecasters still see the economy slowing this year as trade tensions with the US and the campaign to clean up the financial sector remain as downside factors.

As the Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging, investors are interpreting the change in tone as a signal that the government may ease off tightening measures if warranted. Stocks in Shanghai rallied the most in two months Tuesday.

“There’s a deep sense of risk underlying the calm surface, and the leadership’s attitude has changed greatly,” Deng Haiqing, chief economist at JZ Securities Co. in Beijing, wrote in a note. “The attention attached to stabilizing economic growth is the greatest since 2015.”

While trade tensions with the US have been easing, the statement indicates that leaders are preparing to preempt any potential economic turbulence. US Treasury Secretary Steven Mnuchin hinted at a truce Saturday in Washington, saying he’s considering a trip to China and is “cautiously optimistic” about bridging differences over trade issues.

“Against the backdrop of uncertain trade and investment tension with the US, the Chinese government has realized the difficulty of reaching the predetermined growth target,” said Xu Jianwei, a senior greater China economist at Natixis SA in Hong Kong. “This is a significant, rather than slight, change of tone.”

Economists surveyed by Bloomberg forecast growth will slow this year to about 6.5 percent, the same as the government’s target, and then continue decelerating for the next two years. The expansion picked up in 2017 for the first time in seven years, quickening to 6.9 percent.

Leaders at the meeting urged “bolder reform and opening-up efforts and timely implementation of major opening-up policies,” the official Xinhua News Agency reported. They also said China must reduce financing costs for businesses.

As friction with the US intensifies over developing high-technology industries from biotechnology to robotics, the Politburo also called for breakthroughs in developing core technologies and support for new industries and businesses.

The People’s Bank of China cut its reserve-requirement ratio last week, saying the move was to smooth potential disruptions of liquidity levels and ensure lending to the economy continues. Policy makers have also indicated in recent months that a planned tightening of fiscal policy still leaves room to react to macroeconomic developments.

The tone of the Politburo meeting and the RRR cut indicate “preemptive fine-tuning of the pace of tightening, likely due to the external uncertainty amid trade tensions and the faster-than-expected dip in broad credit growth” in the first quarter, according to a report by Robin Xing, chief China economist at Morgan Stanley in Hong Kong.

‘Downward pressure’

“The politburo meeting’s emphasis on boosting domestic demand and lowering funding costs for the real economy has further confirmed that the government is concerned about downward pressure,” Meng Xiangjuan, an analyst at SWS Research Co. in Shanghai, wrote in a note.

The next official health check for the economy comes Monday, when the manufacturing purchasing managers index for April is scheduled for release. In March it posted its first gain since November as factories recovered from a seasonal dip at the start of the year. China’s markets and offices will be closed Monday and Tuesday for the Labor Day holiday.

It’s still too early to read official concern as a clear indication of the direction of policy, according to Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong.

“I wouldn’t read it as a signal of stimulus,” Hu said. “The phrase ‘boosting domestic demand’ is a response to the latest US-China trade dispute. China might concede this time but such a trade dispute could be the new normal in the future.”