China slowing into trade war – fnarena

And while China’s economy is set to soon exceed that of the US in size, the US remains a far more mature economy for which 4% growth is very strong, while a still maturing China has seen its growth slow from double digits earlier in the century. The rate of growth of a maturing economy will, by default, slow, given output in dollar terms will still grow but will represent a diminishing percentage growth rate, but recent data indicate nevertheless that the Chinese economy is notably slowing.

The Chinese government has long been trying to reduce China’s reliance on exports as a driver of GDP and instead promote domestic consumption, as the wealth of the country’s population increases. Consumption weakened in the June quarter. Fixed asset investment (infrastructure, property development) and industrial production shrank further due to a push to reduce debt.

Retail sales may post a first ever single digit growth rate this year (since records began), suggests Singapore’s DBS Bank. Retail sales had grown in excess of 10% (year on year) every month since January 2004 with one exception, but the March quarter this year saw 9.8% and June 9.4%. Industrial production growth fell to 6.7% in the June quarter from 6.8% in March.

Property sales in the March quarter (June quarter data pending) grew by 3.3% year on year despite Citi’s forecast of an -8% decline for 2018. Property starts rose 11.8% against Citi’s 5% full year growth forecast. Land purchases, which lagged significantly early in the year, rose 7.2% in the March quarter against Citi’s 6% full year growth assumption.

Typically, stimulus, be it fiscal (government) or monetary (central bank) is implemented at a time the economy is in recession or at the very least slowing, while strong economic growth leads to monetary tightening and fiscal restraint. Hence the Trump Administration has been criticised by its detractors for substantially increasing the US budget deficit through tax cuts and infrastructure spending plans at a time the US economy is growing strongly late in the cycle, and government debt is already at elevated levels.

In order to encourage the participation of private investment, Citi notes, the government will promote a slew of investment projects in the fields of transportation, oil & gas, and telecoms. The government will effectively guarantee the funding demand of projects already under construction, guiding financial institutions to lend to local governments to prevent these projects being half-finished and non-performing.

China’s banks have been reluctant to lend to local governments this year due to tightened regulation on the financial sector and on local government lending, which are all part of encouraging debt reduction. Now the government will support local government financing demand for key projects, mitigating a rising risk of local government defaults.

The White House has prepared another tranche of tariffs on Chinese exports, this time to the tune of US$200bn compared to the US$35bn now in place. Being was swift to “call” the US with a matching US$35bn but cannot match the raise to US$200bn, given last year China only exported around US$150bn of goods to the US. Originally the new tranche was to attract a 10% tariff but citing "illegal retaliation" from China, and likely frustration from failing to crack Beijing, Trump has lifted that level to 25%.

The “if” is the salient point. The new tariffs will come into effect in early September, pending consultation with the US industries impacted, assuming no resolution with China is reached in the meantime. Despite the odd stumble, Wall Street continues to trade towards all-time highs on a pervading assumption that such a resolution will ultimately be reached.

Talks between US and Chinese trade representatives have supposedly been ongoing for months now, but nothing has been resolved. According to White House economic advisor Larry Kudlow, talks between the two delegations have been fruitful and progress has been made. The reason nothing has yet been resolved is, according to Kudlow, that no deal has been able to get past the Chinese president.

While most on Wall Street and across US industry agree something had to be done about global trade imbalances, most are anti-tariff. Most everyone, for example, wants NAFTA back, and the consensus is that while something specifically needs to be done about China, and if it has to involve tariffs so be it, but why attack America’s allies at the same time?

To that end, we have now seen the EU at least agree to negotiate trade terms with the US that can satisfy both parties. We have the Mexican president suggesting a new deal will be forthcoming. But America’s closest ally, in both senses of the word – Canada – remains offside, while Australia nervously hopes that exemptions will remain in place.

Trade deficit/surplus imbalances are one thing, but when it comes to China the real sticking point is that of investment flows. The White House has accused Beijing of directing foreign investment into US firms while implementing restrictions on inbound investment, with the intention of acquiring intellectual property and forcing technology transfers.