Last Updated : Jan 14, 2019 05:49 PM IST | Source:

Opinion | China faces two options: Domestic stimulus or trade truce with US

Of the two choices, ending the trade war looks by far the better option.

Manas Chakravarty @moneycontrolcom

Manas Chakravarty

Of the two choices, ending the trade war is by far the better option.

The full effect of the trade wars is now being seen in China’s economic data. Its exports for December 2018 fell by 4.4 percent from a year ago. Exporters had resorted to speeding up exports in the pipeline in order to beat Trump’s proposed tariffs. That ‘front-loading’ seems to be have been over by November, resulting in the dismal December exports numbers.

The chart below shows net exports, or exports less imports, were expected to be a drag on China’s GDP growth last year. But the December data show a fall of 7.6 percent in imports from a year earlier.

Manas China copy

Can we trust this data? Well, China’s producer price index (PPI) in December rose 0.9 percent from a year earlier, the lowest rate since September 2016, which corroborates the slowdown.

The chart shows that China’s re-balancing away from investment and export-driven growth is well underway. In 2018, the main driver of growth was consumption, which contributed 4.6 percentage points to the estimated 6.5 percent GDP growth. But December’s contraction in imports suggests that all is not well with consumption demand in China. That has already been shown by car sales, which contracted in 2018 for the first time since the nineties.

This will add to the clamour for a government stimulus. The Chinese people have made a Faustian bargain with their government, giving up personal freedoms in exchange for economic growth. The Chinese leadership is acutely aware they need to stick to their end of the deal to avoid a challenge to their position, both within the Communist Party and outside.

But while they may recognise the need for a stimulus, China’s very high levels of corporate debt make a balancing act necessary. That is why reports indicate only a modest increase in the budget deficit from 2.6 to 2.8 percent this year. There’s also the risk that any excess stimulus will only lead to higher property prices. China’s recent efforts at boosting lending have been targeted at specific sectors.

In many ways then, it’s crunch time for China. Very likely, China’s leadership will have no way out but to delay the inevitable by going in for another round of stimulus. All the more reason for them then to push for a truce to the trade war.
First Published on Jan 14, 2019 05:49 pm
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