China’s economic growth slumped to its lowest level since 1992 as the world’s second largest economy feels the effects of the prolonged trade war with the United States. The country’s Gross Domestic Product grew at 6.2% (annual rate) in the quarter ended June, down from 6.4% in the previous two quarters, according to government figures released on Monday.
And the Chinese economy will continue to face “downward pressure” in the second half of this year, the country’s National Bureau of Statistics (NBS) said in a statement. “The Chinese economy is still in a complex and grave situation. Global growth has slowed and external uncertainties are on the rise,” it cautioned.
The NBS acknowledged China’s trade war with the US has indeed weighed on its economy. While President Trump and China’s President Xi Jinping agreed at the recent G-20 summit to hold off on further tariffs and to restart trade negotiations, most China analysts believe a meaningful trade deal will not be reached anytime soon. I hope they’re wrong.
As you may recall, President Trump had been threatening to put tariffs on an additional $300 billion of Chinese goods, thus affecting virtually everything we buy from China. President Xi, in response, said China was prepared to place new tariffs on more American goods and add additional taxes on US companies doing business (or seeking to) in China. Fortunately, the trade war is on hold for now.
White House Trade Adviser Peter Navarro said in an interview with CNBC last Friday that US Trade Representative Robert Lighthizer will travel to Beijing with Treasury Secretary Steven Mnuchin just ahead. But analysts say question marks remain over whether the two sides can reach a deal to remove tariffs introduced over the past 12 months.
Within Monday’s GDP report, China reported a drop in both exports and imports for the first six months of this year, reflecting the toll the trade war is having on an economy already suffering from weaker domestic demand. China’s exports fell 1.3% year-on-year for the first half in dollar terms, while imports dropped 7.3%. Exports to the US fell 8.1% in the first half of this year.
The trade war and China’s economic slowdown have already hit some of the world’s biggest businesses. Apple’s sales in China have tumbled. Its revenue in the Greater China region, which includes Hong Kong and Taiwan, dropped 21.5% in the 2Q from the same period a year ago, to $10.22 billion. Greater China accounted for about 18% of Apple’s total revenue.
Global auto brands are also suffering as the world’s largest car market slows further this year, following its first contraction in decades in 2018. Chinese consumers are less willing to make big ticket purchases in the uncertain environment, while a government campaign against deadly levels of pollution is also having an impact.
Still, the trade war is helping others at the same time it’s hurting China’s growth. Americans are buying more from suppliers in Vietnam, Taiwan, Bangladesh and South Korea as they try to avoid US tariffs on Chinese consumer goods – which drive up prices, according to data released by the Census Bureau.
This year is the 70th anniversary of the People’s Republic of China, and President Xi promised economic growth of at least 6% this year. With GDP growth averaging 6.3% in the first half, it would have to dip below 5.8% in the second half to fall short of Xi’s 6% target. Most analysts do not believe the government will allow that to happen.
Analysts expect Beijing to unveil more stimulus measures to stabilize growth, including boosting infrastructure spending and possible interest rate cuts by the country’s central bank, the People’s Bank of China (PBOC). While the PBOC has already delivered stimulus in the first half of this year, most China forecasters believe there’s more where that came from – especially if US/China trade talks break down in the next round of negotiations.
The PBOC also has the option of lowering banks’ reserve requirements to stimulate lending. China has already cut the reserve requirement six times since early 2018, and analysts polled recently by Reuters expect two more cuts in the second half of this year.
At the end of the day, the most important thing to watch is the upcoming trade talks. We don’t have an exact date yet, but the impression is that the talks will restart very soon. On this front, President Trump really needs a deal ahead of next year’s election, and President Xi needs a deal as well. This suggests something will happen soon. I’ll keep you posted.
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