Jan 15, 2019 08:08 PM

Caixin View: China’s Trade Woes Go Beyond Trump

* Investment and consumption, not just trade, are proving to be a drag on economic expansion

* Even if trade talks with the U.S. go well, such a development will not be a panacea for China’s trade troubles

(Beijing) — The trade war is, finally, starting to really bite into China’s monthly trade statistics, with December showing a worse-than-expected slowdown in both imports and exports. But despite the dramatic twists, turns and tweets that characterize China-U.S. relations, China’s trade activity in 2019 is not going to be all about this bilateral relationship.

To be sure, whether negotiations to defuse tensions succeed or fail will matter a lot — the U.S. is China’s biggest export market, accounting for just over 19% of the total last year, according to Chinese government data, and is probably even larger if we add in shipments via Hong Kong, which accounts for 12% of total exports. Even assuming half of exports through Hong Kong end up in the U.S., that still means about 75% of China’s exports go to other countries, and domestic demand now accounts for the lion’s share of China’s overall economic activity.

Consequently, economic growth in the rest of the world and slowing expansion at home resulting from softer investment and consumption are likely to put just as much, if not more, pressure on export and import growth in 2019. On the plus side, China’s increasingly diversified trading relationships with the rest of the world provide it with something of a cushion if the current truce with Washington ends without an agreement and the trade war escalates.

Front-loading, in which exporters ramped up shipments to fulfill deliveries before threatened new tariffs arrived, helped support China’s trade figures for much of the latter half of 2018. But this all came to an end in December, when exports and imports saw a year-on-year decline of 4.4% and 7.6% respectively, data released Monday show. That’s the weakest export reading since December 2016, and down from a modest 3.9% increase in November and a 14.3% jump in October. Imports dropped for the first time since October 2016, compared with an increase of 2.9% in November and 20.3% in October.

Slowing global, domestic demand

Weakness in exports spread beyond the U.S., which saw a year-on-year drop of around 3.5% in December. Shipments to Japan, the EU, ASEAN, and South Africa also declined, indicating that this is not just about the bilateral trade war, but also about slowing global demand.

“(China’s) foreign trade expansion may decelerate” this year, a Chinese customs official told a news conference on Monday, citing high comparison figures in 2018 and a “grave external environment.” Uncertainties include both rising protectionism and unilateralism, he said, but also pointed to slowing world economic growth.

The outlook for the global economy as a whole has “darkened,” according to a World Bank report released last week. The Washington-based lender trimmed its forecast for world growth in 2019 to 2.9% from 3.0%, which would be a marginal drop from 2018’s projected 3% growth and the weakest pace since 2016. The U.S.’ expansion is forecast to slow to 2.5% this year from an expected 2.9% in 2018, while China will moderate to 6.2% from 6.5%, according to World Bank forecasts. These are the world’s two biggest economies, and if both see significantly weaker-than-expected activity, the global economy could see an abrupt slowdown, the report warned.

The bank forecast that global trade is likely to grow at a “much weaker pace than previously envisaged,” not only because of trade policy uncertainties but also deteriorating growth prospects in the EU and emerging markets. It projects the eurozone economy, which comprises the 19 of the 28 European Union member states who share the euro currency, will see growth slow to 1.6% in 2019 from an expected 1.9% in 2018. The Markit Eurozone Purchasing Managers’ Index (PMI), an indicator of industrial activity, declined to 51.4 in December, the lowest reading since February 2016. Another dampening factor on export growth is the recent rise in the value of the yuan, which, boosted by a weakening dollar and positive signals from trade negotiations, appreciated past the 6.8-per-dollar line last week for the first time since July.

But trade is only one of three pillars of growth in China. The other two — investment and consumption — are also dragging on expansion. Investment spending is suffering as cash-strapped local governments struggle to raise funds and manufacturers see fewer good opportunities; the residential property market is frozen due to government controls; and the central bank’s efforts to deleverage the financial sector has contributed to a cash squeeze. Consumers are reining in their spending — car sales fell for the first time in at least two decades, and many consumer-goods companies, including Apple, have reported slowing or declining sales. These factors will all put pressure on import growth in 2019, especially in commodities. The Caixin China General Manufacturing PMI dipped to 49.7 in December from 50.2 the previous month, showing a contraction for the first time in 19 months. The survey showed that while external demand remained subdued, domestic demand actually weakened more notably.

The prospects of a resolution in the trade war have improved following negotiations in Beijing last week and news that Vice Premier Liu He is expected to go to Washington for more talks with U.S. officials at the end of this month. The outcome of those meetings may give the world a clearer picture of the prospects for a permanent peace ahead of the March 1 deadline set by U.S. President Donald Trump for the imposition of higher tariff rates on Chinese imports.

But even if trade negotiations with the U.S. go well and, optimistically, the major “structural” issues — including nontariff barriers, alleged cyber espionage and forced transfer of intellectual property — are resolved, it will be no panacea for China’s trade troubles.


Jan. 16: National Bureau of Statistics releases December 2018 data for housing prices in 70 large and midsize cities

Jan. 21: the NBS releases gross domestic product data for the fourth quarter and full year of 2018, industrial production and retail sales data for December, fixed asset investment data for the January-December period, and surveyed unemployment data for December

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