US Trade War Exposes Cracks in China’s Economy

China’s economy has seen better days. Premier Li Keqiang has gone on a whistle-stop tour to cajole Communist Party cadres, as well as holding discussions and panel meetings with academics and economists.

Squeezed by the trade war with the United States, the world’s second-largest economy has continued to slow as the conflict drags on into a second year.

“[We] face mounting downward pressure as the outside environment becomes even more challenging,” he said this week in reference to the China-US conflict, before adding: “We need greater support for the real economy, especially for small- and medium-sized enterprises and private businesses.”

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Li has been championing the private sector for the past two years and, in particular, struggling SME businesses that have been starved of credit lines after being caught in the crosshairs of tit-for-tat tariffs.

“Risks and challenges abroad [have been compounded] by weak domestic demand,” Li told a meeting with provincial governors, which was reported by the cabinet-style State Council, earlier this month.

The “risks” are there in black and white as the numbers coming out of Beijing have been depressing.

GDP growth in the third quarter dipped to 6%, the slowest rate in nearly three decades, as the aftershocks rippled across a broad range of sectors, from retail spending to industrial output.

Big-ticket items such as new car sales have stalled after dropping for the 16th consecutive month in October, while residential property prices have also suffered as consumer debt spirals.

“The trade conflict with the US remains [the] wild card,” Tommy Wu, a senior economist at Oxford Analytics, said. “Elevated US-China tension will continue to weigh on the external outlook, despite the delay of additional US tariff imposition on a range of consumer goods.

“And we think that a [substantial] US-China trade deal remains unlikely any time soon [despite planned phase one agreement],” he added.

With more twists and turns than a Hitchcock thriller, the trade talks reality show has proved gripping viewing. At the same time, the dispute has had a negative effect on the global economy, including the US and the Asia region.

The International Monetary Fund warned of the dangers ahead in October.

“Motivation to find a pathway to a deal comes from the fact that the world economy is slowing,” Kristalina Georgieva, the new managing director of the IMF, told the CNBC network.

Discussions have been bogged down about the detail of a phase one agreement since US President Donald Trump shook hands with China’s Vice-Premier Liu He in Washington last month.

The photo opportunity was staged after what was being billed as an “interim” deal following talks between Liu and US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.

But early euphoria has started to evaporate after Beijing announced that Washington had agreed to roll back tariffs on goods and products worth hundreds of billions of dollars.

“Top negotiators have agreed to remove the additional [duties] in phases as progress is made on the agreement,” Gao Feng, a spokesman at the Ministry of Commerce, said last week.

Reaction

In response, Trump dismissed that claim. “They’d like to have a rollback,” he told a media briefing at the White House over the weekend. “[But] I haven’t agreed to anything.”

On Tuesday, he went even further during a speech at the Economic Club of New York.

“If we don’t make a deal, we’re going to substantially raise those tariffs,” he said. “They’re going to be raised very substantially. And that’s going to be true for other countries that mistreat us too.”

China’s reaction has been played out in the state-run media. Global Times, which is owned by the official mouthpiece of the ruling Communist Party, the People’s Daily, came out swinging.

“The US has once again disparaged the Chinese economy to entertain itself. US President Donald Trump on Saturday claimed China’s supply chain was ‘all broken, like an egg,’ and said China wanted a deal more than the US did.

“The fact is, however, senior US officials are talking about trade wars and trade deals almost every day, while Chinese officials rarely do this. Anyone who knows a little bit about psychology can figure out that such responses of the US reflect anxiety, rather than calmness.”

In the meantime, China’s economy is waiting for a better tomorrow.