China might have to cross those thin red lines

Red is considered an auspicious color in Chinese culture. But not when it comes to balancing the books in the world’s second-largest economy.

As Beijing juggles a myriad of problems from the slowdown in growth to cooling consumer spending, President Xi Jinping’s government knows it needs to end the trade war with the United States.

High-level talks resumed in Beijing on Thursday with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin heading the American delegation.

But while the two-day discussions with Vice-Premier Liu He’s team will grab the global headlines, China’s broader economic malaise appears to be gathering pace.

Earlier this week, the US multinational investment bank, Morgan Stanley, wheeled out a report, predicting that China would become more reliant on foreign capital.

“The economy’s current account is in long-term decline and the future growth of the economy will be increasingly dependent on foreign capital,” the report revealed.

‘Aging population’

A breakdown of the numbers by Morgan Stanley showed that the country’s current account surplus slipped from 10.3% of its GDP in the third quarter of 2017 to 0.4% during the same period last year.

An “aging population” and changing export patterns were major factors in the decline, it stated.

“We expect China to shift to an annual current account deficit from 2019 onwards due to a slipping national saving rate amid an aging population,” Morgan Stanley said.

Economic headwinds have certainly increased in the past 12 months, despite better than expected export numbers this week.

A raft of data at the end of last year illustrated the depth of the downturn.

Last month, the National Bureau of Statistics announced that GDP growth for 2018 slowed to a level not seen since 1990, as manufacturing stalled and consumer spending dipped.

Smartphone shipments also dropped while car sales plunged 5.8% last year to 22.35 million vehicles. This was the first annual decline since 1990.

As the economy continues to slow, bankruptcies are expected to rise this year, fuelling unemployment fears.

Unemployment threat

Vice-Premier Han Zheng highlighted the dangers at a meeting of the National Development and Reform Commission on Tuesday.

“We must closely watch changes in the employment situation, strengthen monitoring and warning [systems] for the employment market, prepare related policy contingency plans, and guarantee stable employment,” he told the state-run Xinhua news agency.

Han’s comments underlined the threat of surging unemployment, which is a red line that cannot be crossed.

By the end of 2018, the jobless rate hovered around 3.8% with 13.61 million new jobs created last year, which was up 100,000 from 2017.

“[But in 2019,] China will face large employment pressure, with more than 15 million newly-added job-seekers in urban areas, including a record number of 8.34 million college graduates expected,” an official from the Ministry of Human Resources and Social Security said.

With the economic picture merging into an array of distorted colors, resolving the long-running trade war has now become a priority for Beijing even if it means crossing a few red lines.