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China’s GDP Falls to 27-Year Low, Worst Yet to Come?

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China released its second-quarter GDP report today. The country’s GDP expanded 6.2% in the second quarter, marking its slowest growth since 1992. In the first quarter, China’s GDP was better than expected and rose 6.4%, meeting economists’ forecasts. In the first half of this year, the Chinese economy grew at an annualized rate of 6.3%.

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Growth in line with expectations

Last year, China’s GDP rose 6.6%. While that growth was slightly above the 6.5% growth the country was targeting, it was nonetheless the slowest growth since 1990. However, nobody really expects China, a $14 trillion economy, to grow by a double-digit percentage now. China has been gradually slowing down and moving toward more sustainable growth. The country is targeting growth of 6%–6.5% this year, and its first-half performance is midway of that target.

Data released today also showed that China’s retail sales, fixed asset investments, and industrial production were better than expected in June. Prior to today, most economic data releases from China have disappointed markets.

The bigger picture

In its data release, China’s National Bureau of Statistics pointed to a “complex environment both at home and abroad.” The country’s economy is feeling the heat from Trump’s trade war, but hasn’t admitted it is taking a toll on its economy. This month,  Nikkei Asian Review reported that Microsoft, Amazon, Dell, and HP are planning to shift some of their production from China. Citing data from Trendforce, Nikkei reported that 47% of Dell’s (DELL) laptop shipments and 40% of HP’s (HPQ) notebook computers are shipped to North America.

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Despite the trade war noise, US stocks are looking good. Amazon (AMZN) and Microsoft (MSFT) have risen 34% and 38% this year, respectively. Meanwhile, Chinese stocks Alibaba (BABA) and JD.com (JD) have risen 23% and 48%. Last month, an Alibaba-backed company acquired a stake in Carrefour’s Chinese operations. Walmart sold its China e-commerce business to JD.com in 2016.

Worse could be yet to come

Although the trade war has had a limited impact on the Chinese economy so far, that could change if Trump goes ahead and imposes tariffs on all Chinese products. While companies have been contemplating moving out of China, they haven’t left the country in a big way. If trade talks fail again, however, and tariffs are imposed on more Chinese goods, we could see an exodus of tech companies from China.

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Apple (AAPL) supplier Foxconn might look at alternate locations for assembling Apple products. Apple is Berkshire Hathaway’s largest holding. Furthermore, US-China trade tensions look like a new normal in the changed world order. Even if the countries reach some sort of deal, companies might still diversify from China.

Slowdown aggravated

Whereas the Chinese economy was slowing down even before the trade war, the recent tensions have only aggravated the pain. In some ways, the trade war hit China at an inappropriate time, just as the country was transitioning from an investment-driven to a consumption-driven economy. China has also been taking measures to address the economy’s high debt levels and curb risky lending.

The country is looking at advanced manufacturing such as robotics and electric vehicles.  The country aims to move up the manufacturing value chain under its Made in China 2025 program. However, amid the trade war, it’s back to the drawing board for China. So far, the country has largely avoided the temptation of a big-bang stimulus, as it would run counterproductive to its goal of addressing the economy’s rising debt. China might have to think outside the box to avert a hard landing if the trade war escalates. Read Why China Might Need a New Economic Model Now for more analysis.

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