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China’s Slowdown Deepens amid Trump’s Tariffs


Jul. 29 2019, Published 11:55 a.m. ET

China’s slowdown has spooked investors this year. Data released over the weekend showed a worsening slowdown in the world’s second-largest economy.

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China’s slowdown

Aggregate profits at Chinese companies with annual revenues of more than 20 million yuan fell 3.1% year-over-year in June. The metric had shown an increase of 1.1% in May. June producer price inflation was weak too. According to Reuters, “Producer price inflation, one gauge of industrial profitability, eased to zero in June from a year earlier, rekindling worries about deflation.” Notably, June was the first full month where an additional $200 billion worth of Chinese goods attracted a 25% tariff in the United States. Cumulatively, Trump has slapped a 25% tariff on $250 billion worth of Chinese products.

Trump celebrated China’s slowdown

China’s GDP expanded 6.2% in the second quarter, marking its slowest growth since 1992. China is targeting growth of 6%–6.5% this year. In the first half of this year, the Chinese economy grew at an annualized rate of 6.3%. While China’s first-quarter economic activity was better-than-expected, its Q2 GDP growth was in line with estimates. The June retail sales and fixed asset investment data that was released alongside the Q2 GDP report was, however, better than expected.

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Notably, US President Trump has attributed China’s slowdown to his tariffs. After China’s Q2 GDP report, Trump blamed his tariffs for China’s slowdown in one of his tweets. However, China sought to downplay the growth slowdown. China called its first-half economic growth “not a bad performance.” China’s Foreign Ministry spokesman Geng Shuang added, “As for United States’ so-called ‘because China’s economy is slowing so China urgently hopes to reach an agreement with the U.S. side’, this is totally misleading.”

Trade war

Several agencies raised China’s growth forecast after its Q1 GDP report. Progress in US-China trade talks also helped allay fears of China’s slowdown. However, in May, Trump accused China of reneging its commitments and increased tariffs on $200 billion worth of Chinese goods from 10% to 25%. The two sides announced a trade truce last month after the meeting between President Trump and Chinese President Xi Jinping. In-person trade talks are also scheduled to begin this week. However, it has been an uneasy truce between the world’s two biggest economies.

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Trade war and China’s slowdown

The IMF has lowered China’s growth forecast, citing trade war concerns. It also lowered the global growth forecast but has increased US 2019 GDP forecast citing strong first-quarter growth. The US economy shattered expectations in the first quarter and expanded 3.1%. The second-quarter advance report showed the US economy expanded 2.1%, which was again better than expected.

Apparently referring to the US-China trade war, the IMF said, “Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted.” Commenting on China’s slowdown, the IMF said, “the slight revision downwards reflects, in part, the higher tariffs imposed by the United States in May.” Former Fed Chair Janet Yellen also sees the trade war affecting the global economy. According to Yellen, “The global economy has weakened. I think partly it’s weakened because of conflicts over trade and the uncertainty that’s caused for businesses.”

Chinese stocks

Last year, amid China’s slowdown concerns, its markets underperformed global markets. This year, the iShares China Large-Cap ETF (FXI) has gained 9.2% year-to-date. Alibaba (BABA) and JD.com (JD) have seen an upwards price action of 30.4% and 50.7%, respectively. However, Baidu (BIDU) is down almost 28%. Both Alibaba and JD.com are benefiting from the strong growth in China’s e-commerce sales.

Meanwhile, China’s slowdown could be further aggravated as several companies are planning to diversify their sourcing away from the country. Earlier this month, Nikkei reported that “Global consumer electronics makers HP, Dell, Microsoft and Amazon are all looking to shift substantial production capacity out of China.” HP (HPQ), Dell (DELL), Microsoft (MSFT), and Amazon (AMZN) are up 6.9%, 13.1%, 40.2%, and 29.4%, respectively, so far in 2019.


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