Mark Williams

Why we want an economic slowdown in China

Mark Williams

Why we want an economic slowdown in China

Trump claims trade war working’; ‘China’s economy grows at slowest pace in nearly 30 years’. Such negative headlines about China’s ongoing economic slowdown are not surprising especially when GDP numbers have been adopted as one of the key measures of a country’s success.

 

Coming in the midst of a trade spat between the world’s two largest economies, now over a year old, reporters are inevitably trying to quantify the damage done so far.

 

We don’t share this pessimism, however, believing there are a number of positives to be gleaned from the latest data and from China’s continued economic rebalancing.

 

The first point to make is we want an economic slowdown. As we said for many years, China’s growth was too fast, driven by debt with cheap money funding bad businesses, and this needed to stop. What we wanted was a switch to more domestically-led growth with less reliance on exports to the developed world.

 

So yes, China’s growth has slowed in the second quarter to 6.2%, down from the first quarter’s 6.4% and 2018’s 6.6%, but this is what most people expected. While it may be the slowest growth in 27 years, we would both expect and hope that it slows slightly more in the coming years. In a world where developed economies struggle to maintain growth above 2% despite extraordinary monetary policies, China’s prospects still seem attractive.

 

Looking at more specific data, Chinese industrial production staged an unexpected recovery to 6.3% growth in June from 5.0% previously, and retail sales rebounded to 9.8% from 8.6% the month before (analysts had expected a further slowdown). Part of the recovery is likely to have been due to earlier tax cuts, deliberately imposed to stimulate domestic demand.

 

This domestic resilience is needed if the economy is to continue rebalancing and further wean itself away from an export-centric model. Although still significant, China’s exports have already become a less important factor for growth. Since the middle of 2013 their contribution to the country’s production has fallen from over 24% to under 18%.

 

Whether or not Trump’s claim that his ‘trade war is working’ is true is a moot point. Our view is that it is unlikely to benefit anyone, and already is a negative.

 

There will likely be an acceleration of alternative sources of production outside China, leading to lower investment than if there had been no tariffs. This will probably happen whatever the ultimate outcome of any deal is. There will also likely be competing technologies developed in parallel as the US’s stated aim to contain China is likely to reverberate. Neither of these can be seen as good.

 

We acknowledge these developments, but believe that the most recent data have given Xi Jinping slightly more time to fix things before China feels forced to make concessions that it might regret.


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Monday, July 22, 2019, 8:24 AM