Is China’s Slowdown Weakening Its Hand in Trade Talks?

• China’s slowdown has worsened amid the trade war. Data released on September 16 showed that China’s industrial production growth fell to multiyear lows in August.
• China has made several overtures to the US this month. From exempting some US products from tariffs to requesting a tariff extension from President Donald Trump, China has extended an olive branch.
• Previously China took a hard line on trade issues. Is China’s slowdown weakening its hand in US-China trade talks?

Data released today show a worsening slowdown in China. The country’s industrial production increased by 4.4% year-over-year last month. China’s August industrial production growth was the slowest in 17 and a half years and was also worse than what analysts were expecting. China’s retail sales growth also fell to 7.5% in August from 7.6% in July. The country’s August retail sales were also worse than expected.

We shouldn’t view today’s economic data as an isolated instance. Almost every economic data point has reflected China’s worsening slowdown. Last week, data showed that China’s industrial inflation was in the negative in August for the second consecutive month. China’s August trade data was quite dismal as well. China’s August exports fell year-over-year. The country’s exports to the US fell sharply last month. China’s exports to the US contracted in July as well. China’s slowdown is only getting worse with the trade war.

Last week, China extended an olive branch to President Trump. First, China exempted some US goods from its tariffs. Then, according to President Trump, the country requested to extend the implementation of the upcoming tariffs. Trump obliged China by extending the October 1 tariffs to October 15. More recently, China exempted US pork and soybeans from its tariffs. Overall, after escalating the trade war in August, China has taken a somewhat soft stance on trade issues. Is China’s slowdown weakening its hand in trade talks?

There seems to be a gradual realization in China that Trump’s tariffs are aggravating its slowdown. When Trump mocked China for its multiyear low second-quarter GDP growth, China rejected that the trade war was hurting its economy. However, over the last couple of months, China has grudgingly admitted that the trade war is indeed hurting its economy. CNBC reported that Chinese Premier Li Keqiang said that it’s tough for China to grow at 6%. For 2019, China is targeting GDP growth of 6.0%–6.5%. In an apparent reference to Trump’s tariffs, Keqiang talked about risks from “the rise of protectionism and unilateralism.”

China’s slowdown is also getting worse amid reports that US companies such as Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) are looking at alternatives to their China sourcing strategies. The sharp fall in China’s exports to the US substantiates this point. However, in the short term, the trade war is also bringing pain for US companies. Developing an international supply chain is not that easy an exercise.

On the other hand, the US economy has been quite resilient. Although US economic growth has slowed, it’s still quite strong considering the global scene. The US consumer sector has been particularly strong. Its impressive performance has been Trump’s strength in the trade war.

Meanwhile, the Federal Reserve’s meeting is scheduled for this week. Trump has called upon the Fed to aggressively cut rates. However, Fed Chair Jerome Powell might not oblige Trump with a big rate cut. Read Federal Reserve Meeting: Can the Party Continue? for more analysis.