China’s economy will not buckle under Trump’s trade war
If one were to believe the news coming out of world media, China is about to concede to US President Donald Trump’s demands: Refrain from “unfair trade practices” and abandon the “Made in China 2025” industrial policy, the reasons for his trade war against the world’s second-largest economy.
According to articles published by outlets such as the South China Morning Post, Reuters and others, Trump is winning the trade war against China. For example, Ben Blanchard and Kevin Yao wrote for Reuters that four “anonymous sources” had said the US-China trade war had caused a rift within the Chinese leadership in part because of the government’s overly “nationalistic” tit-for-tat response. The article added that one “source” indicated Xi Jinping’s influence and power were waning.
According to Blanchard and Yao, these “anonymous sources” said the leadership’s tit-for tat stance had hardened Trump’s stance, which they claimed was causing the loss of 20% in stock market values, a 0.1% year-on-year decline in growth in the second quarter and a 1.5% devaluation of the yuan against the greenback. These “sources” also claim China “overestimated” its strength, culminating in “a state of panic.”
Independent China-based researcher Xu Yimiao wrote in an August 10 the South China Morning Post article that China should cut its losses and concede defeat to Trump. He argued that China was running out of retaliatory countermeasures and overestimated its economic strength. Xu also saw the newly established EU-Japan Free Trade Agreement as a vehicle against China.
Another sign critics have used to show the US was winning the trade is the opposite directions in which the two economies were heading. The US Department of Commerce revealed that the US economy grew 4.1% in this year’s second quarter compared with Q1’s 2.3%. The National Bureau of Statistics of China showed that China’s second quarter increased slower than the first, 6.7% and 6.8% respectively.
But is China losing the trade war?
However, the critics were silent about China’s stock market rebounding since August 8. According to Bloomberg, foreign investors were bullish on the Chinese economy, buying US$2.9 billion worth of mainland shares through Hong Kong links between July 25 and August 8. Since most of the money came from institutional funds looking for long-term investment opportunities, it would seem foreign institutional investors are not worried about China’s economic “slowdown,” stock market losses or currency devaluation.
The US Chamber of Commerce in China has reported that 73% of its members are profitable and 74% planned to expand investment in China in 2018.
The China “gloom and doom” messengers also fail to mention that unlike Western stock markets, China’s are dominated by individual investors who have little knowledge about the economy or capital markets. They only want to make some fast money and for the most part panic at the first negative sign, as they did during the 2017 “Chinese stock-market rout” – which bounced back within a short time period.
Therefore, the stock market in China is never an indicator of economic performance. Rather, small investors see it is a casino in which to make a quick buck.
On currency devaluation, some critics see the trade war is weakening the Chinese economy while others speculate that China is “weaponizing” the yuan to counter Trump’s stance. Either way, that does not mean a weakening economy and capital outflow are in the offing.
Another sign that critics apply to suggest China is taking a hit from the trade war is the fact that the Caixin/Markit Purchasing Managers Index contracted from 5.1% in June to 50.8% in July, suggesting that manufacturing expansion had slowed.
Whether decreases in some economic indicators are a sign that the trade war is taking its toll on the Chinese economy is unclear. But Chinese key economic indicators are far more robust than those of the US, despite its president claiming the economy has never been better.
Further, critics have applied the same logic in past assessments, falling over one another to tell the world that China’s economy is collapsing at the first sign of weakness. They were wrong each time in the past. They will be wrong again because their analysis is inconclusive, lacks long-term data, and to some extent is injected with ideological biases.
Impact on US economy
The 4.1% Q2 growth rate in the US might have been a blip rather than a trend. Surging agricultural exports to bypass tariff retaliation by China and other countries contributed to one full percentage point of the growth rate, according to The Wall Street Journal. Trump’s tax cuts and increased government spending also contributed. Making allowance for these one-time phenomena, the seasonally adjusted growth rate (an indication of long-term growth trend) would be lower.
What’s more, other organizations are not as optimistic as the White House, pointing to a less than successful trade war.
According to an August 8 China Global Television Network (CGTN) report, the Atlantic Federal Reserve revealed that the trade war was forcing 20% of businesses either to postpone or cancel investment plans. If true, US economic growth will contract and unemployment will rise.
The Wall Street Journal has reported that small businesses and startup companies are being particularly hit hard, losing profits and investment funds (largely from China). Unable to withstand the losses, many could shut down, according to the WSJ. Should this occur, the impact on the US economy will be severe because small businesses are its backbone, creating most of the country’s jobs.
In the meantime, US farmers are still waiting for Trump’s promise of a $12 billion bailout. According the US Chamber of Commerce, Trump will require another $27 billion bailout for other agricultural groups. Where he will get that money is a mystery in light of increasing government deficits.
What’s more, the bailouts may only be a Band-Aid solution because they are intended to ease current revenue losses caused by Trump’s trade war against China (and other countries). The long-term pain will be much more pronounced because the US may lose the lucrative China market.
According to the China’s Ministry of Commerce, the country has other sources in Brazil, Argentina, Russia and other countries for its food and animal feed. And even if the European Union caves in to Trump’s bullying and shifts to buying US soybeans, farmers would still face surpluses, culminating in significant price drops.
The latest news on the effects of Trump’s trade war relates to the cost of rebuilding houses destroyed by California wildfires. According to the California Construction Association, the cost will rise because of tariffs imposed on lumber, nails, drywall and other building materials. Such costs would affect not only California, but would apply nationwide.
What’s more, Trump’s trade war against China disturbs the global supply chain, harming other countries, including the US. The parts imported from China and other nations to make the final product in America will become more costly, causing cost-push inflation. Moreover, prices rising faster than wages due to China’s and other countries’ tit-for-tat tariffs may lead to “price or demand pull” inflation.
History is not on the critics’ side, pundits having been wrong again and again over the last 40 years about China’s imminent collapse. Based on the cherry-picking of “facts” or inconclusive analysis, they will probably be wrong again.