China’s economic growth appears to be coming off the boil. That makes the prospect of a trade war more, not less risky.

Data out Thursday came in unexpectedly weak, with retail sales rising at their slowest annual pace since the 2003 SARS outbreak and fixed-asset investment putting in its worst performance since 1999.

Retail Therapy

Chinese retail sales grew at their slowest annual pace since the 2003 SARS outbreak in May

Source: Bloomberg

It’s tempting to regard that as evidence the economy is on its knees, and susceptible to some strong-arming from Washington. President Donald Trump will announce tariffs on Chinese goods worth about $50 billion, a person familiar with the matter told Justin Sink of Bloomberg News late Thursday U.S. time. 

Such a sanguine attitude would be mistaken.

China has a tried-and-tested way of dealing with periods of weakness: Fire up the country’s industrial machine via lavish construction and engineering spending, fueled by a splurge of credit from state banks. Those levers were pulled in the wake of the 2008 financial crisis and then in the period leading up to last year’s Communist Party Congress. Expect the country’s leadership to reach for them again in the face of a trade-war-induced collapse in exports.

That outcome would be disastrous, taking China further away from the economic goals that, oddly enough, are shared by leaders in Beijing, Washington and around the world.

The fundamental problem for China’s economy is that its people fear for their future. Rather than spending their newfound wealth on American products like holidays at the Grand Canyon, imported Lincoln Continental cars and KitchenAid stand mixers, for decades they’ve been socking it away for a rainy day.

Piggy Bank

China has the world’s biggest pool of savings

Source: World Bank, Bloomberg Opinion calculations

With about 15 percent of the global economy, China accounts for 27 percent of its savings, a larger share than any other country. Only three nations had a higher savings rate than the 46 percent China recorded in 2015: East Timor, Brunei and Suriname.

Nest Egg

China has a persistently higher savings rate than any other major economy

Source: World Bank

In the 2000s, this tendency fueled global savings imbalances that contributed to the 2008 financial crisis. Chinese funds were plowed into U.S. Treasuries, weakening the yuan and stimulating Chinese exports while driving down U.S. borrowing costs and helping stoke a housing bubble that ended up destabilizing the world economy.

The near-elimination of China’s current account surplus since then simply squeezed the balloon of excess savings. Instead of being invested in rich-country bonds, they were put to work building a 25,000-kilometer high-speed rail network, five of the world’s 10 tallest buildings, and about 16 billion square meters of residential property – enough to house almost half the population in brand new 80-square-meter apartments

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Homes for Heroes

China has built enough apartments over the past decade to house almost half its population

Source: National Bureau of Statistics of China, Bloomberg, Bloomberg Opinion calculations

This is an addiction that China has to break if it wants to end a tendency toward unproductive investments and curtail the alarming levels of debt described by my colleague Christopher Balding. And indeed, the abolition of presidential term limits last year raised glimmers of hope that more autocratic rule might at least give President Xi Jinping the political space to grasp the nettle.

The trouble is, every time China’s leadership finds itself with the appetite for the long-awaited rebalancing away from investment and toward consumption, it finds itself staring into a terrifying abyss of slowing growth.

Source

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