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Resolving the Trade War Might Not End China’s Woes

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Trade war

There seems to be some optimism about the US-China trade war. The two sides concluded another round of talks on January 31. Previously, Jack Ma (BABA) said that the trade war would last for decades. However, Berkshire Hathaway chairman Warren Buffett (BRK-B) was optimistic about the US-China relations. Berkshire Hathaway’s major holdings include Apple (AAPL), Wells Fargo (WFC), and Bank of America (BAC). Over the last two years, Buffett exited General Electric (GE) and IBM (IBM).

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China’s slowdown

China’s slowdown appears to be getting deeper. Last year, China’s car sales fell on a yearly basis for the first time since at least 1990. US companies like Ford (F), General Motors, and Tesla (TSLA) have significant exposure to China. Apple and NVIDIA (NVDA) have also warned that China’s slowdown has hurt their earnings. The Caixin/Markit Manufacturing PMI showed the second month of contraction in China’s manufacturing activity. The January reading came in at 48.3—the lowest level since 2016.

The data were worse than expected. The official manufacturing PMI was better than expected. However, we should remember that while the official PMI is based on a survey of mainly large state-owned enterprises, the Caixin survey has a larger share of small and medium-sized enterprises.

More steps could be needed

China’s economy has been strained as it transitions to the next level. The pain has been aggravated by the trade war. While solving the trade war would help lift the sentiments, China might still need to do some firefighting to lift the economy. Currency weakening, higher state spending, and loosening property investment requirements could actually be counterproductive this time. Read How the Trade War Opened the Fault Line in China’s Economy to learn more.

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