Chinese economy – still – defies the trade war

The momentum of the Chinese economy has scarcely let up in the past second quarter, despite the fact that the trade conflict between China and the US has escalated massively during the spring months. Although at an annual rate of +6.7 percent, economic growth had recently fallen to a two-year low, it was just “one tick” below the previous quarter’s growth of 6.8 percent. The figure released this morning was in line with expectations. However, the level of relief seen on the Chinese financial markets was contained. These had come under considerable pressure in recent weeks.

It was foreseeable that the escalation of the trade dispute with the US would not yet leave its mark on the “hard” economic data. Not only has the US imposed protective tariffs on USD 34bn of imports from its trading partner since the start of this month – a further US 16bn should come into effect in the weeks ahead. The figures on industrial development and exports were also robust for May and similarly for the entire second quarter. It will become evident in the coming months whether the somewhat weaker growth rates for industrial production and imports in June already represent the first liabilities of the trade war. At least the sentiment surveys in the industry remained surprisingly stable on average in the second quarter and eased only slightly in June.

Nonetheless, we are sceptical as to how the economy will develop further this year. In the next level of escalation in the trade war, the US administration wants to impose punitive tariffs on another USD 200bn of imports. This means that not only around one tenth of Chinese exports to the US are affected but – assuming the tariffs actually come into force – half of all exports destined for China’s most important sales market. It equates to roughly two percent of Chinese economic output. In addition, Beijing is meanwhile powerfully applying the brakes on public investment, with a view in particular to subduing the debt explosion of recent years.

We therefore expect further and even somewhat greater reductions in the growth rates of Chinese gross domestic product (GDP) in the second half-year that has just begun. However, given the still considerable pace of growth in the People’s Republic of China, these are likely to be moderate relative to other countries. At 6.5 percent in 2018 and 2019, GDP growth would reach its lowest rate since 1990.

Given that the Chinese government is keen to insinuate stability and control as regards economic growth and the official growth rates are politically “upgraded” on a regular basis, they are unlikely to allow any growth for now that is persistently below the official growth target of 6.5 percent. This applies all the more in light of the Chinese financial markets, which are switching increasingly to crisis mode in response to the trade conflicts and are reacting very sensitively again to economic data. In any event, Beijing wants to avoid a repeat of the turbulence of 2015. In the event of a slide in exports, we can also expect new state investment measures to stabilise the economy. However, the problem here is that the first tentative successes in containing debt would be dashed and the risks for financial stability would rise again. From an economic policy perspective, the trade conflict is placing the Chinese government in a dilemma.

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