China’s economy has proven to be less immune to the smouldering trade dispute with the United States than the country’s very solid export figures would have led one to expect. The purchasing managers’ surveys carried out in Chinese industry in December were worse than they had been for around three years and this morning they were an unpleasant reminder for financial markets around the globe of the worries about the Chinese economy at the turn of the year 2015/16. Both purchasing managers’ indices – the “official” figure of the National Bureau of Statistics of China and the “unofficial” indicator from the private data provider IHS Markit – fell below the critical 50-point contraction threshold at the end of the year. The last time this happened was in February 2016. Against this background, GDP growth will probably have slowed again in the final quarter of 2018.
Sentiment among Chinese purchasing managers has been souring roughly since spring last year as export expectations turned pessimistic among the polled purchasing managers as the sparring over punitive and retaliatory tariffs gradually gathered momentum. The sub-index for foreign demand has now chalked up a three-year low, indicating a steep decline in Chinese exports. This still contrasts with the country’s export performance which is currently robust and is showing hardly any signs of weakness especially in the most important country for Chinese exports, namely the USA. However, the stable demand in the USA is driven not least by stockpiling purchases with which US importers are seeking to protect themselves against the looming escalation of the tariff dispute. Admittedly, the dramatic tariff hike that had been expected at the turn of the year has been averted for the moment and it remains to be seen whether it will really come into effect as announced in three months. But even if it does not, the anticipatory effects will lose traction in the coming months and the full impact of the US tariffs that have already been imposed on Chinese goods will make itself felt. China’s exporters certainly do not have a rosy year ahead of them.
The trade dispute with the USA has hit China at a bad time: In order to contain the country’s rampant debt, last year the political leadership in Peking slammed its foot down on the government spending brakes. Public sector investments contracted significantly at times. But this policy will now be shelved again for the time being, as President Xi let it be known in his New Year’s address, and this not for the first time. At the turn of the year many taxes and levies were lowered in China, among other things on car purchases. However, as such measures usually only effect growth with a certain time lag, Peking is also likely to fall back again on classic economic stimulus measures, such as infrastructure investments. The first signs of a reversal in state investing activities are already visible. And finally, in the meantime a cautious easing of the monetary policy reins is also on the cards.
The Chinese economy undoubtedly slowed again in the final quarter of 2018. Economic growth had already slowed to 6.5 per cent in summer and was thus just on target. Now, however, in the winter half year the growth rate will probably fall short of the official target again for the first time in three years – but presumably only temporarily. After all, with the economic stimulus measures it has now launched Peking should be able to stabilize growth to such an extent that the target can also be met in the new year, at least barely.