Back in the real world, China-US trade war threats add up to lower growth

The Chinese economy is not about to stall yet but bellwether numbers point to weakening demand from other countries, analysts say

PUBLISHED : Monday, 02 July, 2018, 10:54am
UPDATED : Monday, 02 July, 2018, 10:54am

US President Donald Trump’s assault on trade with China is moving from tweeted threats and abortive talks to the real world.

Purchasing manager index readings for June released on Saturday showed a gauge of export orders tumbling into contraction, the clearest sign yet that the oncoming trade war is having a real, negative impact on growth. From this Friday, the world’s two largest economies are set to begin charging higher tariffs on each other’s goods, marking a major escalation of the conflict.

That’s focusing minds among policymakers in Beijing, as China now faces the tricky task of balancing support for an economy that was already slowing with its ongoing desire to curb excess credit. As the increasingly important services sector remains robust, there’s little need to open the stimulus taps too widely for now, provided the nation remains on track to hit the growth target of 6.5 per cent expansion for 2018.

“China’s economy will slow down for the rest of the year, but we don’t need to worry about any stall yet,” said Zhu Qibing, chief macroeconomy analyst at BOC International China in Beijing. “The key is how international trade and the dispute between China and the US will evolve.”

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The manufacturing PMI stood at 51.5 in June, versus 51.9 in May, and the forecast of 51.6 in a Bloomberg survey of economists. The non-manufacturing PMI, covering services and construction, rose to 55, compared with 54.9 in May. Levels above 50 indicate improvement.

The sub-index of new export orders fell to 49.8 from 51.2, signalling weakening demand from other countries. Gauges for new orders and the backlog of orders also dropped.

That decline was also seen in South Korea’s June exports, which unexpectedly dropped. Part of the reason for that was one-off factors like fewer working days, but South Korea is a key supplier of computer chips and other components to China, which takes about a quarter of its exports. The Korean data comes out earlier than most other countries so it is seen as an early bellwether for the health of global trade.

The China Federation of Logistics & Purchasing, which helps conduct the PMI survey explained in a statement how merely the threat of higher duties could be having an impact on orders in advance.

“In previous months, companies expedited exports because they had foreseen this complicated situation of international trade,” the federation said. “As the trade friction between United States and China escalates, exports start to ebb.”

The arrival of a bear market in the nation’s leading stock exchange and the fastest slump in the currency since 2015’s devaluation have already made it clear that investors are on edge. Now comes the question of how the People’s Bank of China will follow through on last week’s signal that they will be more supportive of growth, and whether the current “structural” approach – where targeted policy tweaks aim at specific sectors, like small business – will be enough.

It’s only just over a week since the last supportive PBOC move, a cut of 0.5 percentage point in the amount of reserves that banks must keep. While that move unlocked about 700 billion yuan (US$106 billion), most of those funds were targeted at supporting a complex debt-to-equity swap programme that’s aimed at cleaning up balance sheets.

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In short, while economists forecast further cuts in the reserve ratio this year, it is not clear that they would be directly supportive of bank credit and therefore broader economic growth. China’s frothy property market and elevated corporate debt level means that simply juicing output via credit is not as easy as it once was.

The central bank will cut the reserve ratio by another 50 basis points each quarter for the rest of 2018, according to a note from economists at Goldman Sachs Asia led by Zhennan Li. The median estimate of economists surveyed by Bloomberg foresees the broader benchmark rate remaining at 4.35 percent through year end.

“We continue to expect the PBOC to adjust its policy stance as needed to cushion any domestic growth slowdown and any materialization of trade friction,” Goldman Sachs’ economists wrote.