Dark clouds from all corners are looming over Chinese economy as it has just moved beyond the bumpy road of 2018.

In 2019, Chinese economy is expected to seek a bottom as slowdown is inevitable, and to stabilize at the end of the year or early next year, standing at a growth rate of around 6.3 percent. With China’s economy entering a new era, policymakers focus more on the quality of growth in addition to the admittedly still necessary speeding up.

In 2018, the quality of China’s economic development was further improved, which is manifest in the following aspects. First, China’s per capita GDP is approaching $10,000 for the first time, and given its large population, this means China has become a huge single market. Second, while the total export-import volume reaches $4.6 trillion, the balance of payments is becoming more balanced nevertheless. Third, the number of Chinese enterprises among the Fortune Global 500 has risen from 30 in 2007 to 120 in 2018, close to the number of 126 based in the United States. Fourth, China’s business environment has improved significantly. According to the World Bank’s Ease of Doing Business Ranking, China moved up to 78 in 2017, and jumped to 46 in 2018.

However, it goes without saying that China’s economy is also facing considerable downward pressure. On the one hand, forecasts for China’s major trading partners are downgraded in 2019. The IMF’s World Economic Outlook, released in October last year, revises down the forecasts of economic growth for the United States, the Euro zone and Japan in 2019 by a year-on-year 0.4, 0.1 and 0.2 percentage points respectively. Advanced economies, led by the United States, Japan and Europe, will see their growth rates fall across the board. It should be noted that after the release of the above-mentioned report, the financial markets in the United States and Europe experienced major fluctuations and adjustments, and the downward trend of the financial cycle may put more pressure on their growth. In addition, if we take into account the overdraft exports brought about by the trade conflicts in 2018, a drop in China’s exports in 2019 will be even more obvious. China’s exports in the first quarter will likely show negative year-on-year growth.

On the other hand, China’s economy is facing a lot of downside pressure domestically.

First, confidence in financial markets needs to be restored. In 2018, China’s financial market was hit many times; its stocks, bonds, funds and internet finance, for example, were all affected. In addition, at present, the widening credit spreads and the high degree of liquidity between banks couldn’t be converted into the loans of enterprises and other market entities. Faced with rising market risks and faltering consumer confidence, investors prefer low-risk or risk-free asset allocations.

Second, investment in the manufacturing is affected by external uncertainties, a tightening financial environment and rising costs, which all destabilized expectations and investment enthusiasm in this sector. In addition, China’s real estate market is caught in a dilemma between various restrictive regulations.

Third, the growth rate of infrastructure investment slumped to 3.7 percent at the end of 2018, compared with 20 percent at one point in 2017. So in 2019, with the shrinking external demand and faltering confidence in manufacturing, will infrastructure investment pick up and play the role of a stabilizer?

We can grasp China’s overall economic policy in 2019 by tracing the changes in it during 2018 and by analyzing the latest statements from the Central Economic Work Conference held in late December 2018.

First of all, a more proactive fiscal policy will be adopted to stabilize manufacturing and infrastructure investment. For the manufacturing industry, larger tax cuts are necessary to make it more profitable. For infrastructure investment, the main source of financial support will be the issuing of special bonds by local governments. It’s estimated that in 2019 incremental bonds of this kind may exceed RMB 2 trillion yuan ($295 billion).

By increasing the special bonds issuance of local governments, it will be helpful to close the “back door” (raising fund through illegal activities) at the local level, and open the “front door” (bond issuance) wider to ensure capital in infrastructure and the manufacturing as well.

Second, the main mission of monetary policies in 2019 will be to maintain reasonable and sufficient liquidity in the banking system and to improve the monetary transmission mechanism.

As noted earlier, there’s sufficient liquidity in China’s interbank market. Still, risk assets have been abandoned and credit spreads remain high. This requires a concerted transmission mechanism of monetary policy. Besides, as the US Fed is predicted to revise up interest rates twice in 2019 before entering a new monetary policy cycle, there will be more operating space in China’s monetary policy, which is expected to play a bigger role.

The author is director of the International Development Department of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.