A surprising thing happened to China this year on the way to reforms as U.S. tariffs unsettled the economy and plans to control debt.
At the end of 2017, President Xi Jinping said 2018 would be crucial for the "three tough battles" against financial risk, poverty, and pollution. It was to be the 40th anniversary of "opening-up" and the first full year of reforms since the 19th National Congress of the Communist Party of China (CPC).
But as 2018 draws to a close, progress on the economic front appears stalled by challenges at home and abroad.
Internal priorities and external pressures have slowed China's campaign against risks, while curbs on credit fall prey to concerns over economic growth.
Last year, the government was slow to heed warnings from the International Monetary Fund about "dangerous" debt levels, although it had already taken steps to restrain reckless borrowing by local authorities and runaway investments in foreign assets like real estate and hotels.
This year, the party line from the People's Bank of China (PBOC) has been that "economic and financial risks remained generally under control." The lukewarm assurance in November stopped notably short of complete confidence in the result.
While government planners had already banked on a gradual but manageable slippage in economic growth rates, they were unprepared for the onset of U.S. tariffs beginning in August and the threat of a trade war.
Forcing a retreat
By October, analysts were seeing signs that the debt reduction battle known as deleveraging had been downgraded to slogan status with little effect.
"Just as China started to come to grips with the scale of its massive debt accumulation, the impact of the trade war with the U.S. is forcing a retreat," the CNBC financial news network said.
Li-Gang Liu, chief China economist for Citigroup, pointed to a massive 1.9-trillion yuan (U.S. $274 billion) stimulus plan for coastal Guangdong province as a harbinger of more debt-driven growth to come.
"Such kind of policy suggests that going forward China's deleveraging has more or less halted," Liu said.
Citigroup forecast that China's ratio of debt to gross domestic product would rise 12.3 percentage points to 274.5 percent by the end of this year.
Scott Kennedy, deputy director of China studies at the Center for Strategic and International Studies in Washington, said the ripple effects from tariffs have topped initial estimates.
"The economy is definitely slowing, the trade war is having a wider effect than originally anticipated, and deleveraging has been shelved for the time being," Kennedy said.
Stemming slippage in growth
China's regulators have been trying to stem the slippage in economic growth, releasing liquidity through the banking system with four cuts in the reserve requirement ratio (RRR) this year.
In the latest reading of lending policies, new yuan-denominated loans in November soared 79 percent from a month earlier to 1.25 trillion yuan (U.S. $181 billion), according to PBOC data.
The most recent official economic indicators have been mostly disappointing, marked by diminishing growth rates.
In November, industrial output rose at a relatively weak rate of 5.4 percent from a year earlier, slowing from 5.9 percent a month before, the National Bureau of Statistics (NBS) reported. Retail sales growth also slipped to 8.1 percent year-on-year from October's 8.6 percent, the NBS said.
"I think the trade wars, actual and threatened, have probably cut at least 1 percent from Chinese growth, possibly 2 percent," said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics.
"The PBOC and other government agencies have tried to counteract the downward pressure by easing credit," Hufbauer said.
Low inflation and low interest rates have made corporate, public, and household debt burdens tolerable. But if inflation rises significantly along with interest rates, Hufbauer warns that "a crisis will ensue."
Effectiveness in doubt
The effectiveness of the infusions this year has remained dubious.
China's more productive private sector, consisting of some 30 million registered businesses, has complained about a lack of access to loans. The preference of state banks for state-owned enterprises (SOEs) at a time of higher risk suggests that planned reforms of SOEs have also slowed down.
Other barometers like China's thinly-traded stock market have contributed to risk perceptions this year. By mid-December the widely-watched Shanghai Composite Index was off by some 23 percent.
The yuan is down 5.6 percent against the U.S. dollar this year, and the country's foreign exchange reserves have lost 2.5 percent.
The declines have cast a cloud over Xi's leadership, just as the CPC celebrates the "opening-up" that launched its era of rapid economic growth.
At a "grand gathering" in the Great Hall of the People to mark the occasion on Dec. 18, Xi glossed over the current economic troubles, offering a combination of party nostrums and assertions of control.
"A review of the past several thousand years shows that reform and opening-up remains the norm throughout China's history," said Xi, according to the official Xinhua news agency.
Targeted efforts
After the annual Central Economic Work Conference that ended Friday, China's leaders issued a statement claiming "initial victory" in the three battles but acknowledging "new and worrisome developments."
The conference called for "targeted efforts" to be taken next year but offered no specifics.
In recent years, the government has tried to manage economic expectations by setting deliberately low and loose annual GDP growth targets of "around 6.5 percent."
The slight deceleration of growth from 6.7 percent last year, at least in the official data, fits in with the government's narrative of a "soft landing" as China transitions to a more sustainable consumer and service-led economy.
While skepticism abounds over the official statistics, these have left room for the CPC to keep its longstanding promise to double GDP in a decade by 2020. The calculation has relied since last year on annual growth rates of at least 6.2 percent.
The official Economic Information Daily recently smoothed the way for this year's results with a forecast of 6.6 percent GDP growth in a joint report with Xiamen University and University of London. The figure matched IMF projections for 2018.
But the outlook for next year is considerably lower, thanks in part to conflicts with Washington.
While the IMF has estimated 6.2-percent growth in 2019, Moody's Investors Service forecasts growth of just 6 percent, the slowest in 29 years.
Dimensions unknown
There are also signs that the true dimensions of China's local government debt problem have been swept under the rug.
In October, S&P Global Ratings Inc. warned of a "debt iceberg with titanic credit risks," reporting that off-book loans to China's local governments may run as high as 40 trillion yuan (U.S. $5.8 trillion).
The estimate more than doubled the official end-of-October estimate of 18.4 trillion yuan (U.S. $2.7 trillion) issued by the Ministry of Finance (MOF) on Nov. 11. The agency has characterized the debt situation as "stable."
Perhaps just as worrisome as the disparity, the S&P report suggested that much of the hidden debt has been held by "local government financing vehicles," the thinly-disguised paper entities which have long since dropped out of the regulatory lexicon.
A report by the official English-language China Daily acknowledged the threat, suggesting that the MOF and the PBOC have been talking apples and oranges on the debt risk.
"The 'hidden debt' of local governments and the high leverage level of nonfinancial corporations could be the riskiest factors threatening financial stability, according to the PBOC's 2018 China Financial Stability Report," the paper said on Nov. 3.
"The high leverage level was identified by the report as the 'origin' of financial fragility," it said.
Steps can still be taken
While the risk assessments flash yellow, Hufbauer believes a crisis is still "some ways off" and unlikely before 2020 or 2021. Steps can still be taken to head it off, he says.
Recommended measures include accommodation with the United States to lower import and investment barriers, temporary tax cuts to provide near-term fiscal stimulus and tighter standards for state-owned banks on extending new credits.
But despite the concerns about debt and financial risk, the government appears to be digging deeper into old-fashioned credit policies for infrastructure projects to buck up GDP in defense of "headwinds."
The government's latest infrastructure initiative is aimed at building up the civil aviation sector, much as it has done for high-speed rail. The development will no doubt be needed, but the timing suggests the plan is all about GDP.
In one of the more sensational reports, the CPC's flagship People's Daily said this month that China is expected to build over 500 "aerodromes" by 2020.
The massive target is reminiscent of the 4 trillion yuan (U.S. $580-billion) stimulus plan in 2008, which has been credited with exempting China from the global recession. Like the earlier debt-propelled program, the splurge on aviation would have major environmental impacts, using vast amounts of land, energy, steel, and cement.
Days later, the Civil Aviation Administration of China (CAAC) publicized a more gradual goal that would increase the number of airports from 234 now to 450 by 2035.
The country currently has 37 airports that handle at least 10 million passengers a year, Xinhua said.