China’s balancing act: A slowing economy, debts and a trade war

Latest figures show GDP rose in 2018 at the slowest pace in 28 years.

Trucks transport containers at the Port of Qingdao in Qingdao, China's Shandong province, April 30, 2018. According to media reports on July 6, 2018, US businesses will now have to pay a 25 percent additional tax on $34bn of imported Chinese goods. China has promised to retaliate with its own tariffs on imported US goods, sparking fears of a trade war which could have a negative effect on the global economy [EPA-EFE/Wu Hong]

By most normal standards, an economic slowdown like the one Beijing announced on Monday should have set off alarm bells on financial markets. China said its gross domestic product (GDP) expanded by 6.6 percent last year.

The last time it recorded such a slow growth rate was in 1990. Back then, it was the world’s 10th biggest economy; today, it’s number two and catching up with the United States.

But the slowdown has been engineered by the Chinese government, and the latest growth figure came as little surprise to economists. China does not have much choice. It needs to rein in the massive debts it piled up in recent years to drive its spectacular rise. By one estimate, those debts total around 300 percent of the size of its economy.

Beijing is now trying to perform what economists call a “soft landing”. That is, it wants its economy to cool off, but not by too much. It has reversed some curbs on bank lending and infrastructure spending. These measures amount to an economic stimulus, but of a much milder variety than in previous slowdowns.

“If they were to go for any kind of stimulus that looks like unbridled opening of the spigots, then that’s going to create perhaps some kind of a backlash in terms of how China is managing its overall credit and financial risks,” Vishnu Varathan, head of economics and strategy for Asia at Mizuho Bank in Singapore, told Al Jazeera.

The US-China trade war is hurting China's economy [Reuters]
The US-China trade war is hurting China’s economy [Reuters]

Trade war complications

And then there’s the trade war with the US. The dispute makes Beijing’s already delicate economic balancing act even more precarious. Analysts say China’s growth rate would be significantly higher if the US had not imposed punitive tariffs last year on more than $200bn worth of its exports. China has retaliated with its own measures.

The government says it can weather the headwinds.

“Downward pressure on the economy is increasing,” said Ning Jizhe, the director of China’s National Bureau of Statistics. “The Chinese economy’s resilience and ability to resist shocks and the long-term trend of stability will not change,” he added.

But the effect of China’s slowdown is already being felt around the world. Apple, maker of the iPhone, lost $55bn of its market value on January 2 after CEO Tim Cook warned of slowing sales in China, blaming the trade war. Its South Korean rival, Samsung, made a similar warning a few days later.

Counting the Cost: Is China’s economy slowing? (24:50)

High stakes talks

The next round of trade talks between the US and China are due to take place on January 30. Economists say a delay in resolving the dispute could hurt the Chinese economy further.

“If there is no trade deal within a reasonable period of time, it would mean that the US reverts to its original plan which was to ramp up tariffs on China from 10 percent to 25 percent on $200bn of their products,” Rajiv Biswas, chief economist at research firm IHS Markit, told Al Jazeera.

“There is also then discussion by President [Donald] Trump over the potential that he could also extend tariff measures to all remaining Chinese exports that don’t currently have these special tariffs on them. If all of those things happen, then of course there’s quite a big downside for Chinese exports,” he said.

Biswas says he’s basing his forecast for China to grow by 6.3 percent in 2019 on the expectation that there is either a trade deal or that a temporary truce that’s due to expire on March 2 is extended.

But any major escalation could result in an even sharper slowdown.

Source: Al Jazeera