GROWTH in the People’s Republic of China (PRC) will moderate this year and next year compared with 2018 given slowing exports and dampened investor confidence as trade tensions with the US escalate. However, accommodative fiscal and monetary policies will help offset those pressures, according to a report by the Asian Development Bank (ADB).

Asian Development Outlook (ADO) 2019 Update forecasts gross domestic product (GDP) growth for the PRC of 6.2% in 2019 and 6.0% in 2020. The PRC’s GDP grew 6.6% in 2018. The new forecasts are slightly below ADB’s April projections of 6.3% and 6.1% growth for 2019 and 2020.

“The PRC economy will see growth stabilize for the remainder of this year and moderate slightly in 2020, supported by a gradual loosening in monetary policy, increased government spending, and solid growth in the housing market,” says ADB Chief Economist Yasuyuki Sawada. “Domestic consumption will be the main driver of growth going forward with the main downside risk stemming from a potential intensification of the trade conflict with the US, he adds.

The services sector is expected to grow faster than industry this year and next year. Manufacturing, especially for the export market, will see lackluster growth as a result of the trade tensions, although the government’s continued support will spur high-tech manufacturing and innovative industries. Services grew 7.0% in the first half of 2019, down from a 7.6% expansion in the same period last year.

Consumption will remain a key - albeit weaker - driver of growth in 2019 and 2020 with consumer spending likely to benefit from government policies, announced in late August, to support logistics services and private consumption.

Meanwhile, the contribution from net exports will moderate in the rest of this year but remain positive through 2020. Merchandise exports to the US will continue to shrink given tariff hikes while slower growth in Europe is clouding the prospects for exports to that region. Exports to Southeast Asia are expected to continue moderate growth.

The report forecasts consumer price inflation to accelerate to an average of 2.6% in 2019 from 2.1% in 2018, compared to the April projection of 1.9%. The forecast increase comes on the back of food price hikes in the first 8 months of this year and likely further increases in the price of pork. For 2020, inflation is expected to retreat to 2.2%, although still higher than the April forecast of 1.8%, as fruit and vegetable prices normalize.

Containing accumulated debt will become more challenging over time given that local governments have high spending needs but a weak revenue base. Local government fiscal revenues are likely to be eroded going forward following the recent cuts in value-added tax (VAT) rates where local governments receive half of all VAT revenues. To tackle this, there should be accelerated reforms to fiscal relations between central and local governments, the report says.