Opinion | How US trade negotiators are misreading China while ignoring America’s dangerously low savings rate

China’s recent economic slowdown is less a result of the trade war than its domestic deleveraging campaign, which can be adjusted as needed. Meanwhile, US economic strength is likely to be short-lived as the effect of its tax cuts fades

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The US delegation of trade negotiators talk with their Chinese counterparts in Washington on January 30. Photo: AFP

Published: 11:01pm, 25 Feb 2019Updated: 1:41pm, 26 Feb 2019

US President Donald Trump’s administration has underestimated China’s resilience and strategic resolve. With the Chinese economy slowing, the US believes that China is hurting and desperate for an end to the trade war.

But with ample policy space to address the current slowdown, China’s leadership has no need to abandon its longer-term strategy. While a cosmetic deal focused on bilateral trade appears to be in the offing, the sharp contrast between the two economies’ fundamental underpinnings points to a very different verdict regarding who has the upper hand.

Yes, the Chinese economy has weakened significantly in the past few months. But, contrary to US perceptions that this is due to its successful tariff strategy, China’s downturn has been largely self-inflicted.

It was initially brought on by a deleveraging campaign aimed at neutralising the mounting risks of debt-intensive economic growth.

To their credit, Chinese policymakers have moved aggressively to avoid the dreaded Japan syndrome – not just a debt overhang, but also a profusion of zombie companies and related productivity challenges.

Largely as a result of this effort, credit growth has moderated from around 16 per cent at the start of 2016 to about 10.5 per cent in late 2018.

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