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China Is in a Tough Situation

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Jan. 3 2019, Updated 1:20 p.m. ET

China

China’s slowdown has been becoming more apparent every day. Several companies cited China’s slowdown when they lowered their outlook. Apple (AAPL) is the most recent and the largest company that cited the slowdown. Apple was Berkshire Hathaway’s (BRK-B) biggest holding at the end of the third quarter.

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Tough choices

While China said that it would look at monetary and fiscal measures to support the economy, it could find itself in a tough situation. Loosening the monetary policy in a major way would only add to China’s debt burden. Over the last few years, local governments in China have used debt to spur growth. China has been looking to control its debt levels. China has been taking measures to cut its risky lending. For industrial investments, China (BABA) (BIDU) has been addressing the overcapacity. So, big industrial investments wouldn’t help this time. Big industrial investments would likely add to the overcapacity situation.

Stimulus

A stimulus for the real estate sector would also add to the already overheated property market. In 2017, at the 19th Party Congress, Chinese President Xi Jinping said that “houses are for living in, not for speculation.” Reportedly, one-fifth of the houses are unoccupied in China.

Talking of trade relations, several of China’s trading partners including the US (SPY) and India have been pushing it to lower the trade deficit. While China opening up its economy would be structural reform, in the short term it could hurt growth. China is in a tough spot amid the slowing economy and the trade war.

Next, we’ll discuss how the trade war and China’s slowdown are hurting US companies.

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