China posted slower economic growth in 2018 under pressure from weaker domestic demand combined with external shocks from the Sino-US trade standoff. Flagging domestic demand reflected efforts to upgrade the economy and address  excessive leverage. Although deleveraging efforts were essential to ensure sufficient control over macro-economic risks，China's policy measures in the deleveraging process contributed to fiscal and monetary tightening，and restricted the expansion of domestic demand. On one hand，infrastructure investment declined due to a shortage of funds，resulting from strict supervision of local government spending and a rigorous cleanup of local government debt. On the other hand，China took steps to clean up shadow banking activities and reduce off-balance sheet financing. This led to a liquidity contraction and strains in funding. In turn there was a deceleration of investment by domestic enterprises and a weakening of household consumption.

Externally，the biggest factor affecting China's economy in 2018 was Sino-US trade friction. Although exports were aided by a weaker renminbi and efforts by enterprises to speed up shipments to the US，the trade friction pinched external demand，and the impact has been apparent since late 2018.

It is unlikely that Sino-US friction will be fully resolved in the near term，so China needs to guide its economy toward a new platform for growth in 2019. It will focus its macro-policy efforts on boosting domestic demand and encouraging new drivers of economic growth. Fiscal and monetary policies will need to be coordinated to achieve those goals.

Traditional Economic Drivers Lose Momentum