US trade war wreaks havoc on China’s economy

China is suffering an acute bout of economic blues. A chill pill is unlikely to ease the pain.

For the world’s second-largest economy, the fallout from the downturn has descended on a broad range of sectors, from retail sales to industrial output, which plunged to a 17-year low in August. Big-ticket items such as new car sales have stalled while residential property prices have also suffered as consumer debt increased.

Earlier this month, data showed that the service sector grew at its slowest pace in seven months in September with the independent Caixin/Markit PMI falling to 51.3, the weakest level since February. But at least it stayed above the 50-point mark, which separates expansion from contraction.

Still, global exports dipped 3.2% last month compared to the same period in 2018 while imports dived 8.5%. Industrial profits also took a hit.

To complete the gloomy scenario, third-quarter GDP growth tumbled to a nearly 30-year low at 6% compared to 6.2% in the previous three months.

“China’s economic slowdown continued over the third quarter [even though] the government [rolled] out support measures to shore up growth. But their effectiveness [was] questionable as they failed to lift either business or consumer sentiment,” a report released last week by the Mercator Institute for China Studies in Berlin stated.

“The measures include cuts in corporate and personal taxes and fees worth around 1.35 trillion yuan [US$190 billion] in the first seven months of this year,” authors Max J Zenglein, the head of program economic research, and analyst Maximilian Kärnfelt said in the study for the influential German think tank.

At the heart of the malaise is the trade war between China and the United States, which has dragged on for 16 months.

The damage inflicted on the economy cannot be underestimated, despite growing optimism that a phase-one agreement is within touching distance.

Highlighting the dilemma facing President Xi Jinping’s government, the Mercator Institute warned in the report:

“The weaker [US dollar-yuan] exchange rate has helped offset some of the negative effects of the ongoing trade war with the United States. Continuous expansion of fiscal and monetary stimulus has cushioned against the economic slowdown, but growth continues to fall.

“In 2019, the negative effects of the trade war have also become increasingly measurable in the manufacturing sector. The year was, so far, also marked by a deteriorating domestic and external economic environment: it saw rising consumer inflation, falling corporate profits [and] softening private investment.

“The slowdown is beginning to expose regional and industrial weak spots. It looks as if the most challenging times are yet ahead.”

Those “challenges” were underlined in the corporate sector.

Industrial profits plunged 5.3% last month to 575.6 billion yuan ($81.48 billion) compared to the same period in 2018. To put that into perspective, the August numbers declined by 2%, data from the National Bureau of Statistics illustrated.

Between January and September, profits topped 4.59 trillion yuan ($650 billion). Again, that was down 2.1% year-on-year and a major drop from the 1.7% reading in the first eight months.

“This fall was due to a faster decline in industrial product prices and slower growth in sales,” the National Bureau of Statistics said on Sunday.

Yet one shaft of light came from the ‘smart’ manufacturing industry. Profits surged 6.3% in the first three quarters compared to the same period in 2018.

In part, that was down to Beijing’s long-term adjustment to its economic model. The focus will now be on high-value, high-tech production linked to a thriving service sector and backed up by consumer spending. But this technology strand has also become entangled in the trade row with Washington.

“‘Made in China 2025,’ seeks to make China dominant in global high-tech manufacturing. The program aims to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with – and then surpass – Western technological prowess in advanced industries,” James McBride and Andrew Chatzky, of the New York-based think tank, the Council on Foreign Relations, said in a report earlier this year.

Time to take another chill pill.