BEIJING (Reuters) - The International Monetary Fund (IMF) cut its 2019 economic growth forecast for China to 6.2% on Wednesday on heightened uncertainty around trade frictions, saying more policy easing would be warranted if the Sino-U.S. trade war escalates.
The downgrade came just two months after the IMF raised its China forecast to 6.3% from 6.2%, partly on then-brightening prospects for a trade deal with the United States. It also cut the growth forecast for 2020 to 6% from 6.1%.
A sudden escalation in the trade dispute last month underlined the risks for the world’s second-biggest economy from higher U.S. tariffs on billions of dollars of Chinese goods.
Washington has levied higher tariffs on a total of $250 billion (£196.8 billion) of Chinese imports since mid-2018, accusing China of forced technology transfers and intellectual property theft. China, which denies the accusations, has retaliated with tariffs on about $110 billion of U.S. goods.
“Growth is expected to moderate to 6.2% and 6.0% in 2019 and 2020, respectively,” IMF Deputy Managing Director David Lipton said in a statement. “The near-term outlook remains particularly uncertain given the potential for further escalation of trade tensions.”
U.S. President Donald Trump has threatened to slap tariffs of up to 25% on an additional list of Chinese imports worth about $300 billion.
The trade war has already upended global supply chains and hurt world growth. Economists say the tariffs will curb growth in the United States and China, and financial markets worry a protracted dispute could tip the world economy into a recession.
China’s central bank has cut the amount of cash that commercial lenders need to set aside as reserves six times since the start of 2018 to spur lending and prop-up its slowing economy.
Beijing is also fast-tracking infrastructure spending and rolling out tax cuts worth trillions of yuan to support businesses, especially manufacturers hurt by the intensifying trade war.
“The policy stimulus announced so far is sufficient to stabilise growth in 2019/20 despite the recent U.S. tariff hike,” Lipton said, following recent meetings with officials in China.
“No additional policy easing is needed, provided there are no further increases in tariffs or a significant slowdown in growth.”
In March, Beijing set a 2019 economic growth target of between 6% and 6.5%. Growth cooled last year to 6.6 percent, the slowest pace in nearly 30 years.
However, risks to the Chinese economy would rise sharply if trade conditions sour more quickly.
“Let me make it clear, if tariffs do go up to say 25% across the board, growth would be affected significantly,” said Kenneth Kang, deputy director of IMF Asia, who led the recent IMF visits.
“In this case we do see a case for temporary stimulus to support the economy, especially if there is a risk to economic and financial instability,” he said.
Any Chinese stimulus to prop up growth should be “contained”, Kang added, referring to concerns about rising debt and financial risks.
Further monetary stimulus steps should be taken while focusing on domestic conditions such as inflation risks, Kang told reporters in Beijing.
The IMF expects the headline inflation rate to rise to 2.3% this year from 2.1 percent in 2018, reflecting higher food prices. Beijing has set a 2019 inflation target of around 3%.
The IMF acknowledged China’s past efforts to contain a rapid build-up in debt, but stressed it was important for Beijing to push forward its financial regulatory reforms despite trade tensions.
“The priority should be to fully implement the announced regulatory reforms and continue with structural regulatory reforms to reduce still-elevated vulnerabilities,” Lipton said.
“Bank capital, especially for small and medium-size banks, should be strengthened, and micro-prudential regulations should not be relaxed, even temporarily, for cyclical reasons or to offset tighter domestic financial conditions.”
Reporting by Yawen Chen and Ryan Woo; Editing by Shri Navaratnam & Kim Coghill