China’s economy lost steam again in Q3. With economic growth coming to 6.5 percent, it actually weakened somewhat more strongly than expected. Given the way the trade dispute escalated over the summer, the trend for the Chinese economy is no doubt being followed especially closely at present. However, the cooling of the economy can hardly be attributed to trade with the United States having decelerated growth. At the moment, this is still being overshadowed by other factors having been brought forward and is being cushioned by the devaluation of the Yuan. Instead, it is Beijing’s restraint on the investment front that has squeezed growth. In the current quarter, the strain from foreign trade may well become more clearly noticeable. We feel that all this bears out our cautious growth forecast for this year of 6.5 percent.
The monthly export figures for the past months in which US customs tariffs were successively raised have not shown any striking weaknesses. In fact, the opposite was almost the case: In September they actually picked up appreciably. And growth in exports to the United States have remained stable, with their total value reaching a new record high in September. By contrast, imports have stagnated at a high level and specifically imports from the USA have of late not grown at all. Three aspects should be considered here: Firstly, the devaluation of the Yuan against the US Dollar of over 8 percent has rendered Chinese exports to the USA cheaper and has partially offset the impact of customs, while making imports from the USA to China more expensive – in addition to the price increases caused by the Chinese tariffs imposed in retaliation. Secondly, the punitive tariffs did not apply during the entire quarter – the bulk of US customs on Chinese goods first came into force on 24 September. And thirdly, this would seem to have led to purchases being brought forward, in particular in September. Foreign trade slightly slowed economic growth in the past quarter, but no more so than it had already done in the first half of the year.
In the final quarter that has just begun, the braking impact could be more pronounced, or so weaker survey figures from Chinese industry suggest. The Markit PMI in September amounted to only 50 points and the results of the surveys conducted by the Chinese statistics office indicate that foreign orders have now fallen to the lowest point in three years. The strain will be even more decisive if the US Administration implements its announcement and increases the customs tariffs at the end of the year from at present mainly 10 percent to 25 percent or imposes special tariffs on additional imports from China. Whether these threats are actually put into practice or are simply to be seen in the context of the pending midterm US Congress elections remains to be seen.
The weaker growth in Q3 is, by contrast, mainly attributable to Beijing’s restraint on the investment front. The government has for months now been throttling back on investments, in particular those in infrastructure, which are now well below the prior-year level. In this way, the Chinese leadership is trying above all to get a handle on the country’s rampant debt. And has scored some minor successes, as the debt ratio has been decreasing for over a year now.
At 6.5 percent, the GDP growth now reported is the lowest since early 2009, the low point of the economic crisis. In Q2, the rate was still at 6.7 percent, and in Q1 at 6.8 percent. In other words, it has weakened slightly faster of late. This fits our view of growth. Our growth forecast for this year is a comparatively cautious 6.5 percent. We assume that growth for the coming year will likewise amount to 6.5 percent. We do not expect that the rate will enduringly fall below the official growth target, which is currently precisely at 6.5 percent. Should the dampening impact of foreign trade increase significantly in the coming year, Beijing will probably resort once again to the usual economic stabilisation tools and increases government investments again. Unfortunately, the cost will be that indebtedness rises once more and with it the risks to stability.