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Exports Keep China’s Economy Warm, but Winter Is Coming

As China’s economic growth weakens faster than expected and uncertainty from the trade fight with the U.S. casts a shadow over business, a surprising driver has been exports. But that may soon peter out.

American clients of Ningbo Frank Electric Co., a Chinese manufacturer of kettles and other household appliances, have been placing orders several months in advance, salesman John Zheng said. “It all looks so good at the moment,” he said. “But it won’t continue.”

China released a gloomy report card Friday on its economy’s performance, with the rate of economic growth sliding to 6.5% in the third quarter, the slowest pace since the global financial crisis. Just ahead of the release–and after Chinese stocks fell 3% Thursday, taking losses to nearly 25% since the start of the year–the country’s top financial regulators all came out with comments to calm investors.

The rare joint effort was followed up by an interview published by the official Xinhua News Agency with China’s economic czar, Vice Premier Liu He, who played down the impact of the trade conflict and suggested low stock prices represent a buying opportunity.

“It shows how concerned they are about the economic outlook and the bearishness across the market,” said Zhou Hao, senior emerging-markets economist at Commerzbank.

For months, China’s economy has been trending down, with a variety of measures including fixed assets, car sales and retail sales slackening. Meanwhile, firms have been gearing up for U.S. tariffs on Chinese products to hit their bottom lines. That doesn’t appear to have happened yet, as U.S. firms have piled up purchases ahead of the tariffs. The usual burst in orders ahead of the American holiday season has also helped.

Chinese exports grew at an average monthly pace of 11.7% during the third quarter, buoying the economy’s weak performance. “Thanks to frontloading, negative impact from the trade conflict with the U.S. is limited so far,” said Grace Ng, an economist with J.P. Morgan.

But Washington has said it will raise tariff rates on some $200 billion worth of Chinese goods to 25% next year, from the current 10%, and is threatening to impose tariffs on an additional $257 billion of Chinese products. Analysts say it is only a matter of time before the rush of advance orders fizzles and clients begin canceling purchases all together.

Macquarie Capital Ltd. estimates that Chinese export growth will decelerate to between 5% and 10% in the coming months. J.P. Morgan’s Ms. Ng predicts exports will start weakening in 2019, knocking overall economic growth to as low as 6.1% next year.

At the annual China Import and Export Fair in the southern city of Guangzhou this week, thousands of Chinese vendors showed off their wares, including electrical appliances, lighting, building materials and hardware. Prospective vendors flooded the exhibition halls of the Canton Fair, as it is known, suggesting health for global trade yet.

But many Chinese firms that rely on the U.S. market are worried about difficult days ahead. American clients of RainMin Illumination Ltd., a manufacturer of LED bulbs that appear in light installations on display at SeaWorld theme parks and festivals such as Burning Man and Coachella, were pushing back orders and emailing to discuss whether the firm will lower its prices.

“It’s the biggest challenge since we set up 15 years ago, even bigger than the 2008 crisis,” said Liu Xiaoyan, one of the firm’s managers.

Mr. Liu eagerly exchanged business cards with prospective buyers from India, although once they left he lamented that their market isn’t developed enough to demand the sort of huge installation projects the firm’s LED bulbs serve. “It’s impossible this time around.”

At a booth selling wine refrigerators, Lu Tao worried that revenues of his family business could fall up to 40% this year. He said he is planning to start selling directly to U.S. consumers on Chinese e-commerce website Taobao, cutting out American distributors. The higher prices he could charge would make up for the tariff costs. “A fridge I sell for $300 now can go for $1000,” Mr. Lu said.

Analysts expect Chinese leaders to move to prop up growth should exports, investment or consumption weaken too much. Keeping the economy at a steady and relatively fast pace is seen as crucial for the Communist Party to maintain social stability. Beijing has time and again stimulated the economy through fiscal and monetary measures, and in recent months has given financial markets more liquidity, while letting the Chinese yuan depreciate to assist Chinese exporters. Policy makers have also successfully urged local governments to issue more bonds, in the hope they will spend on projects again.

Chinese and American businesses are maneuvering to soften the blow of the trade fight. At the export fair, some Chinese vendors said they could make up for some reduction in U.S. orders by selling to other countries. Others boasted that their clients were already thinking about ways to reroute shipping via Taiwan, Mexico and other places not subject to higher U.S. tariffs. A common pitch: China remains No. 1 in the world at delivering well-made products at competitive prices.

Still, analysts say China’s economy can’t avoid the headwinds as the trade fight chips away at business confidence. They aren’t optimistic that tensions between the two countries will ease, even as President Xi Jinping and President Trump prepare to meet at the end of November.

Sandi Kegebein had traveled to Guangzhou from Wisconsin in the hunt for Chinese products for her sourcing company, SC Global Sourcing Inc. Her company has already put in next spring’s orders. “We are buying as much as we can,” Ms. Kegebein said. Should higher tariffs kick in, she said, the company may switch to buying goods already sitting in American warehouses
Source: Dow Jones

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