The numbers make stark reading. In the past few days, manufacturing and export data coming out of China have been disappointing while the world’s second-largest economy is heading for a record year of corporate-bond defaults.
On Tuesday, figures highlighted that exports to the United States slowed significantly in the first half of the year, the General Administration of Customs reported, triggered by the tit-for-tat trade dispute between Beijing and Washington.
“Exports expanded 5.4% in [the first six months] compared with 19.3% a year earlier,” the state-run administration said in a statement. Last month’s export growth was even weaker at “3.8%, down from 27.6%” during the same period in 2017, Xinhua, the official news agency, stated.
Just before the data was released, statistics revealed that corporate-bond defaults so far this year had already reached more “than three-quarters of the previous high” in 2016.
Chinese companies have missed public bond payments of about 16.5 billion yuan (US$2.5 billion), compared with 20.7 billion yuan two years ago, according to Bloomberg.
“Corporate profits have worsened this year and are unlikely to improve against the backdrop of an economic slowdown,” Li Shi, the general manager of the rating and bond-research department at China Chengxin International Credit Rating, said. “Refinancing will continue to be tough as long as the crackdown on shadow banking continues.”
While the downturn and the spat between China and the US have played a role, the government’s concerted clampdown on excessive borrowing during the past two years is the main reason for the rise.
In the first five months of the year, 13 companies defaulted on about 20 bonds worth 14.8 billion yuan, China Chengxin International Credit Rating, which has links with Moody’s, reported.
Growing concerns
If this trend continues, a growing number of private companies will face cash flow problems in the second half of the year.
“They are the most vulnerable to the government’s crackdown on shadow banking,” Zhou Hao, the president of China Chengxin International Credit Rating, told a conference in Beijing. “It is the private firms that are mainly affected in this round of the deleveraging campaign.”
Already concerns are growing that the corporate sector is bearing the brunt of this “campaign” to tackle spiraling debt in the economy, which comes within the brief of Vice-Premier Liu He and the People’s Bank of China Governor Yi Gang.
Last month, Fitch Group sounded a somber note when it announced that dwindling borrowing levels in the private sector would squeeze business investment and hit China’s GDP.
It could even drop by one percentage point to around 5.5% this year compared to the official target of 6.5%. “It is hard to put a precise time frame on when China will start to see deleveraging of the real economy but at some point, it looks inevitable,” Brian Coulton, the chief economist at Fitch, said in a report.
“The scenario analysis we have undertaken suggests that, when it does occur, it will be a process that will be a [major] drag on growth,” he added.
Of course, this is not the only challenge facing Beijing.
Clouding the issue is the threat that US tariffs, worth up to $34 billion on a range of Chinese imports, will take effect on July 6. If that happens, Beijing will respond with similar duties on an array of US goods, escalating tensions.
Diplomatic rhetoric such as this has seeped through to the real economy. Earlier this week, the Caixin-Markit Manufacturing Purchasing Managers’ Index, or PMI, reported that activity last month declined to 51.0 from May’s figure of 51.1.
Although it remained above the 50-point mark which separates growth from contraction, the independent survey showed that new export orders contracted for the third straight month.
“The index for new export orders fell to a low for the year so far and remained in contraction territory, pointing to a grim export situation amid [strained relations] between China and the US,” Zhong Zhengsheng, the director of Macroeconomic Analysis at CEBM Group, a subsidiary of Caixin Insight Group, said.
On Saturday, the official PMI from the National Bureau of Statistics also pointed to tumbling export orders with data dipping into negative territory in a clear sign that the trade conflict is having a serious impact on growth.
Although the PMI stood at 51.5 in June compared to 51.9 in May, the sub-index of new export orders fell to 49.8 from 51.2, illustrating a distinct downturn in sentiment.
The China Federation of Logistics and Purchasing, which is involved in producing the survey, confirmed that anxieties about tariffs were behind the weak “new export” numbers.
“In previous months, companies expedited exports because they had foreseen this complicated situation of international trade,” the China Federation of Logistics and Purchasing said in a statement. “As the trade friction between the United States and China escalates, exports start to ebb.”
But China is not the only country suffering. Manufacturing weakened across Europe and Asia last month with exporters losing momentum, underlining fears that President Donald Trump’s protectionist policies could derail global growth.
Manufacturing slowed
German factory output slipped to an 18-month low and French manufacturing slowed more than previously thought in June. While British factories continued a steady pace of growth, apprehension of a full-blown global trade war has eroded confidence.
“Today’s numbers continue to corroborate that manufacturing settled into a lower gear in the first half of the year,” Neal Kilbane, senior economist at Oxford Economics, told Reuters.
“The very real threat of the current trade dispute with the US escalating further means that Europe’s manufacturers are likely to have to negotiate stormy waters for the rest of year,” he added.
Shipments from Japan also contracted last month while businesses across the region were pummeled by higher costs as the price of oil and raw materials jumped, monthly manufacturing PMI surveys emphasized.
Still, Wilbur Ross, the US Commerce Secretary, made it clear on Monday that global turbulence would not shake Trump’s resolve to take a wrecking ball to the world trade system.
“All these claims that the sky is falling are at least premature and probably inaccurate,” he told CNBC.
In response, Beijing could quote the ancient Chinese proverb, “When the wind of change blows, some people build walls, others build windmills.”
Batten down the hatches, we could be in for a hurricane.
The Chinese will build windmills. A very resoursful people!
All these crap because an incompetent moron’s ego. In the long term China can 100% win this "war" as its 1.3b+ pop’s full production and consumer potential is far from tapped while US is already over consumed. Instead of devising constructive and legitimate ways to settle dispute stablilize the system and open markets trump is as any incompetent moron does, throwing weight around thinking that’ll get what he wants. This is on international level we are talking here and on peer statues unlike sub-servant japns and koreans, competent diplomats will avoid getting each other in a corner where backing down is impossible, which is exactly where trump is leading everyone.
Too early to call!
When the tariffs work through to create loss of market share and employment, US will back down as it enters a recession.
However lost markets are not easily regained as new supply networks are established. This will be good for long term economic stability as US is effectively broke, desperate and not a reliable trading partner. Tariffs accelerate the process of rebalancing global economic activity.
Just another bla bla article
The US is taking itself out of the global system – it was a major hub – but the rest of the world is still trading with each other. Which is more self sufficient, the USA by itself, or the rest of the world by itself ? I guess time will tell.
Countdown to Armageddon
Is right now, unfortunately no exciting and exotic title on a new spy novel. It’s a real ticking bomb triggered by the last presidential election in the United States 1½ years ago. Just as much as I hate to give Trump the dubious honor to have the power to start the Armageddon, I must admit that I have to give the man credit for trying the best he can. The man has a talent; he has proved that by mobilizing anger, nationalism and hatred against a world he has sworn to dismantle. The man has the ability to shatter and devastate everything he gets closed to. “For a four years old boy with a hammer, everything looks like a nail”. It takes decades and sometimes centuries for a beautiful tree to grow up, but one can cut it down by a chainsaw in a few minutes. Surrounded by an army of idiots, Trump plows through everything that has been built up with long-term diplomacy and numerous compromises. By pulling America out of the international negotiated Paris accord, TPP, JCPOA etc. Trump is destroying virtually everything the world order is build on.
Legendary Bike manufacturer Harley-Davidson has announced that it moves part of its production to Europe and The Mid-Continent Nail Corporation in Poplar Bluff, Missouri, said this week that it had recently laid off 60 of its 500 workers because of the hefty 25 percent tariff that the Trump administration has slapped on steel imports from Mexico and Canada. Storm Clouds are not gathering in China or Europe alone. They are gathering in United States too.
Napoleon has reportedly once said: “When your enemy is making a mistake, never interrupt him.”
Americans are digging their own graves, we shall let them dig.
Trump offered to match every country that will eliminate tariffs. Of course no one took him up on it. But he exposes the hypocrisy of the countries who complain of his tariffs while quietly hoping no one will focus on their tariffs prior to any retaliatory tariffs. Trump is sick of the one sided trading regime.
Yeah, kindergarten grade level trumsters as expected. Even going by your "reasoning" Did trump also offer to end the dollar system? 0 Tariff for everyone sounds good until its realised US alone still holds the dollar system that basically giving it huge advantage over everyone else, which was originally intended for use in another system. In fact, US can easily fix its trade issue by humbly dial down its abuse of dollar issuance, reign in debt spending and scale down consumption which will naturally fix the deficits, but thats too honest and low key way to go compared with a bombastic demagogue selling false victimhood and driving up blood pressues. Nvm that, even if previous system has built in design flaws you guys hired a kindergartener to do adjustments on a kindergarten skill level. Hope you live quiet a while longer to see and enjoy all that transpires as you wished.