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US-China Trade War: Gloomy Exports Give Beijing 3 Reasons To Worry

The dramatic and sharp contraction of China’s exports and imports last month has not only confirmed the downward trend of the Chinese economy, but also further raised the risks to its growth prospects amid the uncertainty over a possible full-blown trade war.

China’s export growth in US dollar terms tumbled 4.4 per cent year on year in December, from 3.9 per cent growth in November and 14.3 per cent the month before. Meanwhile, imports fell 7.6 per cent from 2.9 per cent growth in November and 20.3 per cent in October.

The December data, released on Monday, has confirmed the worst fears of China’s policymakers – as well as investors in China-related assets – in at least three ways.

Firstly, it provided the first clear evidence of how US President Donald Trump’s punitive tariff measures are starting to bite. Shipments to the United States in particular worsened as a result of the tariffs. Export growth to the US fell by 3.5 per cent year on year in December from 9.8 per cent growth in November, significantly below the average growth of 12.9 per cent in the first 11 months of 2018. The sharp contraction in China’s exports to the US suggests that front-loading is almost over.

The higher tariffs China levied on US supplies also hit overall import growth. Imports from the US were down 35.8 per cent year on year in December compared to a fall of 25 per cent in November. Soybeans, China’s second-largest American import, fell last year for the first time since 2011.

Secondly, the latest data has only added to policymakers’ worries as it reflects a further deterioration in US-China trade relations. Although China’s trade surplus with the US shrank in December, annually it rose to a record high of US$324 billion for 2018, a jump of more than 17 per cent from a year earlier.

Trump has long seen this trade imbalance as evidence of China’s unfair and predatory trade practices and has been demanding Beijing take concrete steps to significantly reduce it. China’s worrying trade figures came as senior US and Chinese negotiators were meeting in an effort to strike a deal ahead of a March 2 deadline on their tariff-war truce.

Despite the optimism over a possible solution after mid-level talks wrapped up in Beijing last week, perennial, multi-front economic and technological competition between the world’s two largest economies will not be easily settled with a handful of trade concessions.

Thirdly, the latest data is ominous for China’s growth outlook as it showed both weakening domestic sentiment and global demand. The across-the-board weakness in imports, which resulted in the highest monthly trade surplus since 2015, suggested weakening domestic sentiment, although contracting prices for commodities might have also helped push down demand. China’s exports to its main markets – the US, Europe and Japan – all fell in December, reflecting weaker global demand.

This is particularly worrying to policymakers as it came amid a slew of fiscal measures and monetary easing aimed at boosting growth in recent months, ranging from selective credit easing, corporate tax cuts, more spending on infrastructure and incentives for lifting consumption.

Earlier data had suggested that China ended 2018 on a soggy note, with a clear downward trend as factory gauges entered contraction territory, producer prices edged closer towards deflation and manufacturing activity was weaker than at any point since February 2016.

A significant slowdown in export growth in this export-oriented economy would result in much weaker industrial production growth, weaker domestic consumption, rapidly rising unemployment and slower GDP growth.

The Chinese authorities will take more aggressive measures to stabilise growth in the coming months after a major shift in policy focus was unveiled at the Central Economic Work Conference – the Communist Party’s annual policymaking meeting – from the deleveraging and de-risking campaign announced at the previous gathering towards a more growth-supporting policy easing.

Stabilising trade has become one of the goals the Chinese leadership has set for 2019, on top of supporting employment, foreign and domestic investments, the financial sector and market sentiments – the so-called six stabilities. Among China’s trio of growth engines – exports, consumption and investment – exports usually play a critical role in affecting confidence in the other two sectors. Thus, China’s 2019 outlook will become clearer and more predictable only when the dust on the make-or-break trade war has settled down.
Source: South China Morning Post

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