IEEJ：January 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (412)January 24, 20192018 Chinese Economic Growth at 6.6% with Sharp Deceleration Seen in 2nd Half
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn January 21, the National Bureau of Statistics of China released major economic
indicators for 2018 outlining Chinese economic conditions. Among them was gross domestic
product worth 90.3 trillion yuan ($13.3 trillion) for the year, posting a real economic growth rate of6.6%. The growth rate, though exceeding the government target of 6.5%, was the lowest in 28 years
since 1990 when the 1989 Tiananmen Square incident affected economic growth.
A quarterly growth trend in 2018 indicated a clearly gradual deceleration from 6.8% in thefirst quarter to 6.7% in the second, 6.5% in the third and 6.4% in the fourth. Particularly, the fourth
quarter growth of 6.4% was the lowest in a decade since the first quarter of 2009 when growth wasaffected by the global recession following the collapse of Lehman Brothers in September 2008.
The economic growth deceleration came as tighter economic policy following the brisk
growth in 2017 was combined with the U.S.-China trade war that deteriorated and intensified in thesecond half in a manner to affect overall economic activities including investment, production andconsumption. Particularly, major components of the current Chinese economy were seriously
affected, including domestic demand-related consumption and imports, as well as production thatslowed down on the trade war.
The Chinese government came up with a 4 trillion-yuan economic stimulus package in
response to the economic slowdown after the Lehman collapse, taking advantage of infrastructure
and other investment to achieve a rapid economic recovery. However, the large-scale stimulus
package led to some adverse effects including excess production capacity plaguing the Chinese
economy later, as well as a debt overhang in which debt expanded at local governments andstate-owned companies that undertook infrastructure investment.
As a result, how to address excess debt and production capacity has become a key
challenge in China’s economic policy, leading the government to explore a domestic demand-driven
economy. In 2018, the tertiary industry’s share of GDP expanded to 52% indicating that services
grew dominant in the Chinese economy. Consumption’s share of GDP also increased to 76%. Under
such economic structure, drops in consumption, exports and production through the escalation of theU.S.-China trade war have become a grave problem for China today.
For example, China’s retail sales have reportedly declined rapidly since November lastyear. Imports decreased substantially toward the end of last year, with wholesale price hikes sagging,signaling weak consumption. Then, vehicle and smartphone production decreased year on year. In
the second half of 2018, production of these products, robots and machine tools posted substantial
year-on-year decreases. The deterioration coincided with the intensification of the U.S.-China trade
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war, indicating weakening sales. The sharp production decline may lead to concerns about economic
deterioration, which could further cool down consumption.
Infrastructure development utilized for stimulating the economy after the Lehman collapse
has caused the abovementioned debt overhang and cannot be easily mobilized at present. Rather,slack infrastructure investment at the local government level has been contributing to the slowdown.
Some economists suspect that Chinese economic growth could be lower than the published level of6.6%. In any case, the Chinese economy is in serious condition, prompting the government, thebusiness world and experts in China to seriously explore the possible counter measures on what to
do with the current problems.
On January 22, the International Monetary Fund (IMF) released its latest World Economic
Outlook (WEO) forecasting that China’s economic growth would decelerate from 6.6% in 2018 to6.2% in 2019 and 2020. Many experts in and outside China predict its economic growth in 2019 at
levels a little above 6%. If growth slips below 6% on the further escalation of the U.S.-China trade
war and the deterioration of China’s domestic economy, Beijing may have no choice but todesperately mobilize all possible measures to stimulate the economy.
The latest IMF WEO forecast global economic growth in 2019 at 3.5%, representing adownward revision of 0.2 percentage points from October 2018. While the U.S.-China trade war has
continued to escalate, economic deceleration has been expected in Europe, resource-rich countries
and emerging economies, prompting the IMF to become conscious of downside risks for the world
economy and update its outlook. However, the forecast growth rate of 3.5% represents “normalcruising growth” rather than low growth. Nevertheless, uncertainties are lingering about the futureenvironment for the world economy. At a time when China and the United States are waging a trade
war after driving global economic growth, no optimism can be warranted about the future course of
the world economy.
Global economic deceleration will exert various grave effects on international energy
markets. Serious effects are likely to affect oil, natural gas/LNG, coal, renewable energy and nuclear
markets. Particularly, China’s energy demand expansion pace will attract global attention.
Economic and oil demand/import trends in China would be one of the most importantfactors for the outlook for crude oil prices for this year. The other factors include OPEC-plus
production trends and policy, U.S. shale oil production expansion and Iranian oil exports. Given that
China’s LNG demand expansion has exerted a decisive impact on the supply-demand balance in theglobal LNG market, China’s gas demand and LNG procurement trends would be important forpredicting the global gas market supply-demand balance and investment decisions. Similarly, China
would have decisive influence on global coal trade and prices.
Furthermore, future electricity demand in China will variously influence renewable energy
expansion and nuclear power plant construction in which China has played a globally leading role.
Chinese demand for each energy source will influence its energy mix and have various implications
for its environmental policy involving both climate change and air pollution. Structural talks
involving the U.S.-China trade war will attract attention for the immediate future. China’s economic
trend under the trade war in 2019 will remain a matter of grave concern to the world.

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