Source : THE AGE NEWS
China’s economy is holding up better than expected during this first phase of Donald Trump’s trade war. If it can sustain this, however, is an open question.
Government data for May released this week shows there are shifts occurring within the Chinese economy, with strong retail spending offsetting weak investment and continuing factory-gate deflation.
There’s also a major change happening in China’s trade balance, with exports booming despite the trade tensions, but imports falling away.
China’s economy is still holding up in this early phase of the trade war, but first cracks are emerging.Credit: AP
The backdrop to the economic data is, of course, the trade war started by the US president, and the manoeuvring by China and America in response to his tariff threats, which – with China’s threatened retaliation – would amount to a complete trade embargo between the world’s two largest economies.
While Trump – after China halted the flow of critical rare earths to the US – backed away from the 145 per cent tariff rate he momentarily imposed on all imports from China (which had drawn a retaliatory 125 per cent tariff from Beijing), the trade relationship remains unresolved.
The deal struck in London earlier this month buys time, until August, for the countries to thrash out a longer-term trade relationship. But for the moment, the US has a tariff rate of 55 per cent on China’s exports and China, despite Trump’s claim that it has levied US imports with a rate of only 10 per cent, has an effective rate above 30 per cent.
At those levels, trade flows will be impacted, as will both countries’ economies.
To date, the trade war has had some distortive effects.
It pulled forward US imports and retail spending in March, with an associated bump in China’s exports to America, which have since fallen away. US retail sales declined in April and May and China’s exports to the US plunged 34 per cent last month.
The fallout from the trade war also shows in China’s economic numbers, with the tariff uncertainty hitting private investment hard. There was zero growth last month compared to May last year and foreign investment was down 13.4 per cent.
It could cost China the golden chance that Trump’s “America First” assault on trade and geopolitical alliances and multilateral institutions has created.
The growth in fixed asset investment overall in China slowed from the 4 per cent in the first four months of the year to 3.5 per cent in the five months to end-May, even though manufacturing investment was up 8.5 per cent and public investment rose 5.9 per cent.
The unusual feature of the May data was the unexpectedly strong growth in retail sales, which grew 6.4 per cent year-on-year, an acceleration from the 5.1 per cent rate experienced in April.
That’s a reflection of Beijing’s limited attempts to stimulate consumption via its subsidies for trade-ins of household appliances. Their sales soared 53 per cent, while mobile phones and other communication devices – also covered by the trade-in policy – jumped 33 per cent.
The surge in exports to the US in March was driven by “front-loading,” or a scramble by US importers to grab stock before the tariffs cut in.
Donald Trump and China’s President Xi Jinping: While Trump has backed away from the 145 per cent tariff rate on China, the trade relationship remains unresolved.Credit: AP
The retail sales splurge in China could be seen as analogous.
The budget for the trade-in subsidies is capped, with some regional governments having already used up their quotas. The subsidies will have drawn forward spending, which makes the spike in sales a one-off event – once a household has bought a new washing machine, it’s unlikely to be in the market for another for some time.
There may also have been some impact from an earlier-than-usual annual online shopping event, which may also have attracted forward spending from June.
In both economies, consumer confidence remains brittle – in the US because of the uncertainties generated by Trump’s erratic trade policies and in China because of the continuing deterioration of its ravaged property markets, the repository for estimated 60 to 70 per cent of its middle-class wealth.
Property prices continued to fall in May. After the market had appeared to stabilise earlier in the year following a range of policies introduced late last year aimed at shoring up the market, prices in April and May have started sliding again.
Consumer confidence and spending will continue to remain weak until it is clear that the property market has bottomed out.
For China, with the stimulus funding budgets to tail off in the second half of the year and the impact of Trump’s tariffs likely to show up more materially as the year progresses, it will be a challenge to achieve Beijing’s target of 5 per cent GDP growth this year.
Exports have been booming, partly because of the front-loading of sales to the US but also because China’s exporters have scrambled to diversify their markets.
Some exports will inevitably have been re-routed to countries with lower tariffs, providing a backdoor entry to the US market.
Others are displacing domestically produced goods in other economies, with the growth of exports to South-East Asia, Latin America and Europe causing increasing trade frictions and pushback from those economies, who face having their domestic manufacturing bases hollowed out if China’s former export volumes to the US are diverted to their markets.
China’s broad strategy over the past decade – encouraging and subsidising exports while trying to create a self-sufficient domestic economy, one that doesn’t rely on imports, by subsidising domestic companies, particularly those engaged in advanced manufacturing – isn’t sustainable in the new trade environment.
Whatever the final shape of the trade relationship with the US, China’s exports to the US will be lower than what they were before Trump regained the presidency, and China will experience increasing resistance from its other trade partners to any attempt to compensate for lost US volumes by redirecting those exports to their markets.
In the longer term, China will have to do something about the excess capacity in its domestic manufacturing base, which reflects wasteful and increasingly unproductive over-investment, even if that means a lower economic growth rate.
It will have to accept lower export volumes and do more to stimulate domestic consumption or face increased friction with all its trade partners that could create an existential threat to its current economic model.
It could also cost China the golden chance that Trump’s “America First” assault on America’s traditional trade and geopolitical alliances and multilateral institutions has created – the opportunity to diminish America’s dominance and elevate its own role in global affairs.
