China: Good News, Bad News

[Valin]

Strategy Page

May 7, 2019:

Over the last few days more American tariffs were imposed on Chinese imports, ending a truce in the trade war between the two nations. The Americans accuse the Chinese of delaying negotiations in an effort to weaken American resolve. That has worked in the past but not this time and financial markets in the U.S. and China both declined. It was telling that the Chinese markets declined much more sharply. That was the point the Americans were making, that China was more vulnerable in this trade war.

While the American economy is booming the Chinese economy has hit a rough patch. Chinese GDP growth in 2018 was 6.5 percent and many economic indicators continue declining while those in the United States are growing. This is a reminder that the current trade war with the United States favors the Americans for many reasons that Chinese leaders cannot ignore. China has hit economic slumps since the 1990s, usually the result of economic problems in the West. But now the cause is China because of a lot of bad decisions are catching up with the Chinese leadership that made all the mistakes in the first place. Years of tolerating corruption and ignoring the growth of bad loans (that were at the basis of much corruption) means that just borrowing more money to give the economy a boost will not work. A sharper decline in Chinese economic activity would have worldwide impact because China is a major trading nation and a major customer for raw materials, semi-finished goods and some high tech items. Fewer orders from Chinese firms has major impact on national economies worldwide. That’s why global financial markets have been in turmoil since 2018 and prospects of a turnaround are not good. The Americans demanding an end to Chinese bad behavior comes at a bad time for China.

(Snip)