By Michael Lelyveld
As China’s economy weakens under tariff pressure, the government may be in danger of breaking one of the Communist Party’s most important pledges to guarantee growth.
Most analysts believe that the damage to China’s economic growth rate from current U.S. tariffs will be limited to only a fraction of 1 percentage point of gross domestic product.
In late August, Bloomberg News estimated that the trade war would lower China’s GDP by 0.2 of a percentage point this year and 0.3 of a percentage point in 2019, citing a median of forecasts from 16 analysts.
The numbers suggest that the trade war would hasten the ongoing deceleration of China’s growth rate, which has already slipped from 6.9 percent in 2017 to 6.7 percent in this year’s second quarter before tariffs took effect, according to official figures.
Experts believe that the economic impact is likely to be moderately negative and manageable, but political consequences could be more severe.
A separate Bloomberg poll of economists estimated that next year’s growth will decline from 6.6 percent this year to 6.3 percent in 2019.
At the low end of the range, China’s government could be at risk of failing to meet its longstanding 2020 growth goal.
“While that’s still much faster than other major economies, slower growth will imperil the nation’s aim of doubling the size of the economy in the 10 years to 2020,” Bloomberg said in August, taking the latest $200-billion (1.3-trillion yuan) tranche of U.S. tariffs into account.
The weakening trend would drag growth down into the range of 6.2 percent, which economists have calculated as the minimum needed to fulfil the Chinese Communist Party’s historic promise to double GDP in the decade since 2010.
Hu Jintao’s goal
In 2012, former President Hu Jintao set the goal of doubling both GDP and per capita income by 2020, delivering the development benefits of the party’s policies.
At the time, Hu’s promise was estimated to imply average annual economic growth rates of about 7 percent.
By maintaining relatively high official growth rates in the intervening years, the National Bureau of Statistics (NBS) was thought to be giving the government enough slack to implement tougher reforms while keeping its eye on the 2020 calculation.
Over the past two years, the government has assured itself of room to maneuver by setting loose annual growth targets of “around 6.5 percent,” which were easily achieved.
But that was before the surprise pressures from international “headwinds” and the tariff challenge.
Now, the country’s GDP may be in danger of falling below both the 6.5- percent level and the 2020 goal.
Some recent forecasts see China’s growth as dropping below the 6.2-percent level. Last month, Fitch Ratings estimated that the 2019 rate would decline to 6.1 percent.
On Sunday, the government showed concern over the pace of the slippage as the People’s Bank of China (PBOC) lowered its reserve requirement ratio (RRR) for banks by one percentage point, marking the fourth cut this year.
The reduction would have the effect of releasing 1.2 trillion yuan (U.S. $174.7 billion) into the market, although 450 billion yuan (U.S. $65.5 billion) would be used to pay back previous bank loans, the PBOC said.
The move came on the same day as a further sign of worry as the PBOC said its foreign exchange reserves edged down for the second month in a row to U.S. $3.087 trillion, flirting with the psychologically troublesome U.S. $3-trillion mark.
The pressures appear to be piling up on the 2020 promise.
‘Potentially serious issue’
As a result of frequent repetition, officials have turned it into a critical measure of both China’s and the Communist Party’s success.
Falling short could test the legitimacy of the party’s policies and the leadership of President Xi Jinping, who has assumed nearly unlimited levels of control.
David Bachman, a China scholar and professor of international studies at University of Washington in Seattle, said that Xi and Premier Li Keqiang may be able to blame U.S. President Donald Trump and his unforeseen policies if the 2020 goals are not met.
“I think that psychologically for the party and the leadership, that pledge to double is still quite important to them, but … it will be something you can excuse away without a lot of blowback, at least from society,” Bachman said.
The political fallout may not end with the public’s reaction, however.
“Within the party, where people might have a desire to go after Xi Jinping and perhaps Li Keqiang, there’s where I think it could be a more potentially serious sort of issue,” said Bachman.
Critics may use the occasion of a broken economic promise to argue that Xi’s push for great power status had brought China into conflict with an unpredictable President Trump.
“I could see this politically playing out as a plank in an opposition program to Xi Jinping,” Bachman said.
Because Xi has monopolized power, he will find it hard to escape blame for the tariff war and the failed pledge to double GDP, he said.
“He is responsible for it because he’s taken on responsibility for everything,” Bachman said.
Lowell Dittmer, a China expert and political science professor at University of California, Berkeley, agrees that Xi will be on the hook for China’s economic performance, even though he inherited the 2020 goal from Hu Jintao.
“He can hardly avoid that,” Dittmer said. “He’s taken the helm. He wanted it and he’s got it.”
Dittmer said he has been surprised by the level of resistance to Xi’s power grab among Chinese intellectuals, who previously embraced the less restrictive “opening up” policies of the late leader Deng Xiaoping.
“In a lot of respects, Xi has gone against Deng’s model for economic growth with more centralization, the end of term limits, and the emphasis of the party above all. That wasn’t Deng,” Dittmer said.
The largely private misgivings about Xi’s cult of personality suggests there could be conflict between his political power and the power of Hu’s 2020 promise. Dittmer noted that many officials were ousted following the last economic downturn and the stock market slump in 2015.
What will be the remedy?
If the tariffs continue and the economy risks failing the 2020 test, it is unclear what the government’s remedy will be.
The government has been pursuing its deleveraging campaign for the past year to control China’s debt, but the effort may be set aside if growth continues to slow, Dittmer said. The alternative of pumping up growth with a new wave of stimulus spending may pose unacceptable risks.
Another solution to the 2020 problem may be to pump up the official figures.
“If they have to, they’ll fudge the statistics,” Bachman said.
But the NBS has already been struggling with data credibility problems for over a decade and would face an outcry from international economists if it grossly overstates the GDP numbers, as it was suspected of doing in 2015.
Most recently, the NBS pledged a “continued hardline stance” and “zero tolerance” for data inflation and falsification at the local level.
On Sept. 18, the agency publicized a series of local data fraud cases as part of a “name and shame” campaign to discourage the practice.
NBS inspectors found “official interference” with economic reports from Tongliao city in eastern Inner Mongolia, citing false data in 20 major industrial enterprises, 11 retailers and three service companies, the official Xinhua news agency said.
China is said to be putting “more emphasis on the authenticity of data amid lingering economic headwinds.”
“Progress has been made and basic statistics are generally real and reliable, the NBS said, while acknowledging data falsification still exists in some places,” according to the Xinhua report.