Is China’s Economy Recovering from Trade War Shock?

  • Trump’s trade war has hit the Chinese economy. Some of the Chinese economic indicators show that the economy might have bottomed out. This month’s economic data has been largely better than expected.
  • The two countries have agreed to phase one of the trade deal that should see China buying more goods from the US. The trade war has hit both the US and the Chinese economy.

China’s economy

On multiple occasions, President Trump has said that his tariffs are hitting the Chinese economy. Also, China admitted to the fact although belatedly and somewhat begrudgingly. Meanwhile, the US-China trade war has hit business sentiments in both countries. China’s economy, which was already slowing down, was further hit by the trade war. However, some of the economic indicators show that the worst of slowdown might be behind us.

Data released yesterday showed that China’s retail sales rose 8% YoY (year-over-year) last month. The data was better than expected. Notably, Alibaba (BABA) reported record Singles Day sales last month. The official data also showed that China’s industrial production rose to a multi-month high of 6.2% in November.

However, the fixed asset investment and property sector data were soft. Notably, the real estate and fixed asset investment sector have been a key pillar of the Chinese economy. The sector is a major consumer of metals, ranging from steel to aluminum.

China’s trade data: Impact of the trade war

Prior to yesterday’s data releases, there have been some other data points that showed a bottoming in the Chinese economy. For instance, China’s November producer price inflation was also better than expected. However, it’s still in negative territory. Also, China’s imports increased YoY in November. The rise in Chinese imports reflects strong domestic demand.

Notably, prior to November, China’s imports rose YoY in only April this year. That said, China’s exports were weak last month, which resulted in a lower trade surplus. Meanwhile, China’s exports should improve after phase one of the trade deal. Read China Trade Data Shows Trade Surplus Narrowed for an overview of China’s November trade data.

Along with the official data, the private Caixin PMI survey showed an expansion in the Chinese manufacturing sector last month. However, US manufacturing PMI is still in the contractionary zone. Notably, while the tax cuts were expected to revive the manufacturing sector and boost corporate investments, the two sectors have actually been the weak links in an otherwise resilient US economy. So, US GDP growth has shattered expectations in all three quarters this year.

Chinese economy: What’s the Central Bank doing?

Chinese Central Bank has also taken some measures to support the economy. However, these have been incremental measures and the country hasn’t resorted to big bang monetary stimulus.

Globally, central banks have been on a rate-cutting spree. Notably, the US Federal Reserve has lowered rates three times. However, now the Fed seems to have stayed put on more rate cuts. Read Why Powell Didn’t Cut Interest Rates to learn more.