Collateral damage spreads in US

After the conclusion of an important meeting of the Communist Party of China Central Committee, the participants said China seeks to make its fiscal policy more effective and maintain "reasonably ample" liquidity. And instead of resorting to a stimulus in the real estate market, China will lay emphasis on "proactive fiscal policy and prudent monetary policy".

It is a challenging balancing act, but the right stance at the right time.

Meanwhile, White House pledged to impose an additional 10 percent tariff on Chinese imports to the US, which caused US stocks to tank 280 points. The White House needs a scapegoat as the Fed cuts cannot offset Trump's tweet policies, US growth is slowing and a slowdown is looming in 2020.

The CPC Central Committee seeks to avoid targeted but costly stimulus policies, which could exacerbate new risks of asset bubbles over time, while ensuring adequate fiscal support. Since infrastructure investment remains relatively soft by historical standards, fiscal easing on investment is likely in the second half of the year. And it could be tilted toward small enterprises and startups.

This year's growth to be within range

Moreover, fiscal easing is likely to be coupled with monetary support, including cuts in the banks' reserve requirement ratio. Although the fiscal easing tilt could cause downward pressure on Chinese bond yields and corporate spreads in the near future, the big picture suggests stabilization and resilience.

In the second quarter, the Chinese economy grew 6.2 percent compared with 6.4 percent in the first quarter, but that was hardly surprising in view of the global challenges. China's economic growth is within the target range of 6 percent to 6.5 percent set by the government. Indeed, a growth rate of 6.2 percent for the whole of 2019 remains achievable even if growth stabilizes around 6 percent to 6.2 percent in the second half.

In view of the CPC Central Committee meeting, policy authorities are likely to continue making efforts to cap debt growth. While that will support the Chinese economy in the long run, the potential risk in this approach is premature tightening in the short term. To avoid adverse outcomes, fiscal easing is likely in the second half of the year, while monetary easing will be likely to offset riskier scenarios.

Such stances could benefit Chinese stocks, which will also be supported by the anticipated foreign inflows, thanks to the inclusion of Chinese assets in international benchmarks. Despite the relatively benign macroeconomic prospects, more optimistic scenarios are constrained by the lingering uncertainty over the Sino-US trade war and caution in economic sentiment.

American economy is a different story

In the second quarter, the United States' GDP grew 2.1 percent, which heralds a "slowing economy". Last spring, I predicted in China Daily that the US economy would begin to feel the collateral damage more broadly by the summer. And a month ago, I argued that this damage is spreading, particularly as the White House is initiating new tariff wars against other countries.

That is one reason why the US Federal Reserve－in a widely expected move, but one that critics see as a sign of diminished independence－cut interest rates by 25 basis points to a range of 2 percent to 2.25 percent for the first time in more than a decade. The Fed also declared a premature end to its balance sheet reduction.

Ironically, the Fed's statement－unchanged economic conditions, solid job gains and moderately rising economic activity, though soft business investment－did not necessarily warrant a rate cut (the decision was not unanimous). What motivated Fed Chairman Jerome Powell's decision may well have been the muted inflation pressures and particularly global growth concerns, which the White House has undermined since the onset of its tariff wars in spring 2018.

Interestingly, the Fed cut did not cause a rally; it stumped the market. S&P 500 dropped almost 2 percent and 10-year Treasury yields to about 2 percent. The Fed's interest cut does not imply a start of a new rate cut cycle. Instead, it does mean the post-2008 recovery is now over with darker clouds looming on the horizon.

Tariff wars cloud US and global forecasts

When US President Donald Trump assumed office in January 2017, he pledged GDP growth at 4 percent. More recently, he projected US growth at 3 percent. Yet analysts estimate US growth this year at 2.5 percent or less. Qualitative assessments suggest deterioration, as the growth of domestic demand is slumping.

Worse, US GDP growth forecasts for 2020 indicate softening to 1.8 percent, possibly a (near-recession) slowdown－especially if trade and tech wars still escalate. In the absence of negative surprises, China's GDP growth is likely to stay within the target of 6.2 percent in 2019 and possibly in 2020 as well, with supportive fiscal and monetary conditions. US tariff wars are likely to penalize the Chinese economy by less than 0.5 percent of GDP, which could be offset by just a modest depreciation of the renminbi.

If recent policy mistakes in the White House prevail, slower growth in investment spending, rising concern for continued trade wars and destabilizing geopolitics are likely to foster downside risks in global economic prospects, as risks for further downgrades morph into actual realities.

The author is the founder of Difference Group and has served at India, China and America Institute (US), Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). The views of the article do not necessarily represent those of China Daily.