Liberalisation takes back seat in China as trade war intensifies
Small private firms are the first casualty in the tariff tit-for-tat exchange by Beijing and Washington. But these are precisely the type of companies the Trump administration is relying upon to transform mainland China’s economy
Donald Trump and other hardline trade warriors in the White House should be careful what they wish for. Any “victory” will be pyrrhic, despite the damage it could inflict on China and the collateral harm to the rest of the world, not to mention the already shaky global trading regime. The latest data from China is showing signs that run contrary to the reforms Washington wishes to force on China. Caixin’s monthly purchasing managers survey shows that export orders continue to contract for a fifth straight month, with more employers cutting staff.
Smaller mainland manufacturers are the most vulnerable, with growth in their business activity slowing to a 14-month low in August amid the trade war and the central government’s drive to reduce financial risks. The Caixin survey contrasts with the official purchasing managers index, which shows a slight expansion. This is because the Caixin manufacturing PMI gives weight to small and medium-sized firms, mostly privately owned. The official PMI measures mostly large firms, many state-owned.
The Politburo has ordered measures to stabilise investment, trade, finance and employment, along with monetary easing and supplemental fiscal spending. This month, the People’s Bank of China cut its reserve ratio by 1 percentage point, the fourth time this year. The move allows domestic banks, mostly state-owned, to lend more money in a slowing economy. Such official stabilising measures have already shown some success in the rebound of the official PMI. But the hard-hit smaller private firms, which will drive any market-opening efforts demanded by the United States, often miss out. According to the same Caixin survey, the employment index also contracted further in August, dropping to its lowest level in a year.
If Washington aims to reduce the trade deficit and open the China market, there needs to be structural changes in the mainland economy to switch from its reliance on manufacturing to one driven by consumers. But when you drive up unemployment, you directly undercut consumer spending and confidence. A new analysis by the International Monetary Fund has warned of the mutually assured damage the world’s largest economies will suffer. Economic growth in the United States is expected to slow to 2.5 per cent in 2019 from 2.9 per cent this year. Meanwhile, China’s growth will drop to 6.2 per cent, from 6.6 per cent this year, according to the IMF. In yet another report, the fund’s economists warn that risks to the global financial and trading systems have been significantly worsened by the escalating tit-for-tat tariffs the two sides have imposed. As China battens down the hatches, liberalisation will take a back seat. Is that really what Trump wants?