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China’s economy is hurting and a trade deal can’t come a moment too soon for Beijing

Deal or no deal, the ongoing US-China trade war has already taken its toll on the Chinese economy. The latest evidence is the decline in profits in China’s export-oriented manufacturing industry. In the first two months of the year, Chinese industrial firms’ profits fell 14 per cent year on year, to 708 billion yuan (US$105 billion), according to the latest data from the National Bureau of Statistics. It is the sharpest contraction since 2009.

Obviously, the trade war with the United States has dealt a severe blow to China, the world’s second-largest economy, and weighed on Chinese factory activity, corporate earnings, business and consumption.

The trade row halved China’s industrial profit growth, from 21 per cent in 2017 to 10.3 per cent in 2018. Some sectors were hit harder than others. Automobile industry profit fell 42 per cent in the first two months of the year, as vehicle sales dropped for eight straight months up to February.

Profit from the manufacturing of computers, communications and other electronic equipment plummeted by 21.6 per cent., and fell by 15.7 per cent for the broader manufacturing industry.

Weaker profits might cramp investment and growth, while also worsening manufacturers’ credit profiles. Such macro headwinds are likely to slow fixed-asset investment, with many industrial firms shelving their plans amid uncertainty. Indeed, fixed-asset investment for manufacturing rose less this year, by 5.9 per cent in January and February, compared with 9.5 per cent in the same period last year.

Some economists predict that China’s industrial firms will post declines this year, the first time since Beijing began releasing such data. Despite surprising signs of growth shown by the March Caixin/Markit Manufacturing Purchasing Managers’ Index, released on Monday, final demand is still weak as growth in exports, new homes and passenger cars has not caught up.

Other official economic figures, released consecutively by the Chinese government, also confirm the downward trend. For instance, China’s exports crashed by 20.7 per cent in February, after a drop in trade with the US. The jobless rate crept up to 5.3 per cent in January and February, from 4.9 per cent in December.

Beijing has already lowered the economic growth target this year, to 6-6.5 per cent, from the 6.6 per cent achieved last year, which was the slowest GDP growth since 1990. Economists estimate that China’s real growth has cooled to 5.3 per cent in the first two months, based on the monthly indicators most tightly correlated with gross domestic product.

In the face of such unprecedented challenges, policymakers have at their disposal only two prescriptions for the alleviation of economic pain – introduce more stimulus measures or end the destructive trade war.
Speaking at the Boao Forum for Asia last Thursday, Premier Li Keqiang squarely rejected any suggestion for providing a “flood-like stimulus”, out of concern that quantitative easing might build on a mountain of debt and introduce more economic risk.
Sealing a deal to end the trade war with the US would help, and such an agreement can’t come soon enough. That is why President Donald Trump claims the US has the upper hand in the trade negotiations. “I think China wants to get it resolved. Their economy’s not doing well,” he has said.

For sure, the trade war has not only hurt the manufacturing industries, it will also stunt investment, kill jobs, weaken consumption, destabilise financial markets and so on – all of which runs counter to the government’s policy goal of ensuring the so-called “six stabilities” this year, in the areas of employment, finance, foreign trade, foreign investment, domestic investment and market expectations.

This explains why the trade talks are speeding up and going well beyond expectations. Note, in particular, that US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin were in Beijing on Thursday and Friday. China’s chief trade negotiator, Vice-Premier Liu He, is paying a reciprocal visit to Washington on Wednesday and may be close to finalising a deal.
Source: South China Morning Post

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