Economic chill hits China as trade talks continue

Freezing temperatures hit Beijing on Friday with a frigid -3 Celsius predicted for late night diners and nightclub revelers.

While China’s economy is not exactly in an icebox, the latest inflation data released by the National Bureau of Statistics showed that the cooling business environment had dipped a notch or two.

The numbers came out just hours before the US-Sino trade talks wrapped up in the Chinese capital amid signs of hope.

“It is too early to say China has entered the deflationary [zone], but the risks definitely have heightened,” Raymond Yeung, the chief economist of Greater China at ANZ, said.

As for the figures, factory inflation slowed for the seventh straight month with the important Producer Price Index rising by a meager 0.1% in January compared to the same period in 2018.

The Consumer Price Index, which strips out food and energy costs, jumped 1.7% year-on-year. But that was just a slight increase from the 1.8% figure in December.

Deflationary pressure

Still, the PPI stats have fueled concerns of further deflationary pressure which could squeeze corporate profits.

“With factory-gate deflation likely to deepen in the coming months, we expect policymakers to roll out further measures to ease financial pressure on industrial firms, including cuts to benchmark lending rates,” Julian Evans-Pritchard, a senior China economist at Capital Economics, said.

Since the third quarter of 2018, the economic picture has become distorted by a raft of depressing data.

Last month, the National Bureau of Statistics announced that GDP growth for 2018 slowed to what at first glance appeared a robust 6.6%. In reality, that was the slowest pace in 30 years as manufacturing stalled and consumer spending stagnated.

Smartphone shipments also dropped while car sales plunged 5.8% last year to 22.35 million vehicles. Again, that was the first annual decline since 1990.

But the first real snapshot of the Year of the Pig came earlier this week when the Ministry of Commerce and the statistics bureau reported slumping sales growth for the Chinese festive period.

During the seven-day holiday, consumers spent 1.01 trillion yuan (US$148.96 billion) at restaurants, shopping centers and online outlets. Yet, even though that was an 8.5% rise compared to 2018, it was still the slowest rate of growth since at least 2011.

Coupled with the latest inflation numbers, a surge in bankruptcies and the threat of unemployment on the horizon, Beijing is likely to boost measures to stimulate a sluggish economy.

“2019 could see the return of PPI deflation and negative earnings growth,” Larry Hu, the head of China economics at Macquarie Securities, warned.

Trade discussions

The downturn has certainly focused minds within President Xi Jinping’s inner circle. But it is open to debate whether that urgency spilled over into trade discussions this week.

Talks between Vice-Premier Liu He’s team and the United States delegation, headed by Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, concluded on Friday.

Early indications suggested there were still key sticking points, including enforcing any agreement.

Apart from the ballooning trade deficit with the world’s second-largest economy, crucial issues on the US side centered on intellectual property theft, forced technology transfer, Beijing’s state-subsidies model and the “Made in China 2025” plan.

“We feel that we have made headway on very, very important, and very difficult issues,” Lighthizer was reported as saying during a later meeting with Xi with the rest of the US party. “We have additional work to do but we are hopeful.”

The state-run news agency Xinhua even reported that talks will continue in Washington next week, according to remarks made by Xi. But until those “difficult issues” are resolved, it is unlikely the planned mini-summit between US President Donald Trump and China’s head of state will take place.

If that happens, a new economic Cold War could descend on Beijing with chilling consequences.