The Chinese economic slowdown is getting worse due to the trade war. President Trump’s tariffs will likely broaden the problem.
Chinese economic slowdown
China’s economy has gradually slowed down. The country’s second-quarter GDP growth rate was the lowest in 27 years. On Friday, China released its July PPI (producer price index) and CPI (consumer price index). The two metrics measure the inflation for businesses and consumers, respectively. China’s July PPI fell 0.3% YoY (year-over-year) in July. China’s PPI approached zero in June. The metric continued to fall in July and has turned negative. Notably, China’s PPI fell below zero for the first time since August 2016. The falling PPI is another indicator that points to China’s economic slowdown.
Consumer inflation rose
While China’s PPI fell into the negative territory last month, its consumer inflation rose. China’s July CPI rose 2.8% in July. The metric was at 2.7% in the previous two months. Notably, the Fed has been concerned about lower inflation. The Fed cited weak inflation in the US as one of the reasons for lowering rates last month. Meanwhile, China’s CPI didn’t rise due to higher consumer demand. The increase was mainly due to the spike in food prices. Rising fruit and pork prices pushed China’s food inflation to 9.1% last month. The Chinese economic slowdown and food inflation don’t bode well for citizens.
Data stokes fears of Chinese economic slowdown
On Thursday, China released its July trade data. The data showed a contraction in imports. China’s imports have fallen YoY in six of the seven months this year. Falling imports are an indicator of China’s economic slowdown. China’s July manufacturing PMI was also below 50. PMIs below 50 signal a contraction in the activity. China’s industrial profits fell in June. Lower corporate profits also point to the Chinese economic slowdown.
China depreciated the yuan
Meanwhile, China depreciated the yuan compared to the US dollar. A weaker yuan would help China’s export sector. Higher exports could help China address its economic slowdown. The US designated China as a “currency manipulator” after the yuan depreciated. The two countries agreed on a truce in late June. However, the US-China trade talks don’t seem to be heading in the right direction. Both of the countries have hardened positions. President Trump announced tariffs on another $300 billion worth of Chinese goods. In retaliation, China stopped buying US agricultural products, which will impact US farmers. However, the move will also impact China. The country is already battling high food inflation.
IMF took note of China’s economic slowdown
The IMF took note of Chinese economic slowdown and lowered its 2019 global growth forecast to 3.2%. The IMF said, “In China, the slight revision downwards reflects, in part, the higher tariffs imposed by the United States in May.” President Trump has mentioned the Chinese economic slowdown several times. He said that his tariffs hurt the Chinese economy. Larry Kudlow, President Trump’s economic adviser, also spoke about China’s slowdown earlier this week.
The Chinese economic slowdown hurts US companies with significant exposure to China. Earlier this year, companies like Apple (AAPL) and Nvidia (NVDA) warned that the Chinese economic slowdown impacts their earnings. Equity markets have come under pressure this month amid the escalating trade war. So far, the iShares China Large-Cap ETF (FXI) has fallen 4.7% in August. Alibaba (BABA) has fallen 6.3%. Jack Ma, Alibaba’s co-founder, expects the US-China trade war to last a long time.
No easy fix to Chinese economic slowdown
Reportedly, several companies plan to shift some of their sourcing from China. Companies shifting their base could deepen the Chinese economic slowdown. Despite the sagging economy, China shied away from easing property market restrictions. Along with addressing the economic slowdown, China has to watch higher debt levels in the economy. There isn’t an easy fix for China’s economic woes. The country needs to think outside the box to address the slowdown concerns. The Chinese economy suffers from some structural issues like a high dependence on exports and the infrastructure sector. President Trump’s trade war exposed China’s vulnerabilities.