China’s Cooling Economy Spells Trouble Ahead for Global Growth

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Confirmation that China’s economy is slowing amid an escalating trade war is a worrying omen for global growth.

Data released since Friday has affirmed what’s been expected for some time: That an ongoing campaign to curtail credit is putting the brakes on the world’s second-largest economy. Given that China generates as much as a third of global growth, that’s adding to signs that the best world expansion in years is plateauing.

The International Monetary Fund, which has repeatedly warned that the trade spat between the U.S. and China will reverberate globally, is scheduled to release fresh growth forecasts later Monday. The Chinese economy grew at an expected 6.7 percent in the second quarter, its slowest pace since 2016, while key readings on investment growth and industrial output slowed in June. Retail sales held up.

Read more on the latest data on China’s economy

While the numbers point to a modest slowdown in China, the U.S.-led trade war has only just begun. U.S. President Donald Trump this month implemented tariffs on an initial $34 billion of imports from China, which retaliated in kind. Trump is expected to deliver levies on another $16 billion worth of goods and has threatened to expand the hit-list by $200 billion. China has threatened to retaliate again.

That means headwinds not just for China’s economy, but for the world’s too.

“If the US and China do not resume talks in the next two months or so, the conflict will escalate further, with major economic implications for themselves and the global economy,” Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong, wrote in a note after the data’s release.

The global tensions were clear to see at a summit between leaders of the European Union and China in Beijing. E.U. President Donald Tusk warned that trade wars can lead to “hot conflicts” while summit host, China’s Premier Li Keqiang, said nobody will win from the dispute.

It’s the spillover effect that most worries economists, given China’s central role in a regional and global supply chain that feeds America’s economy with goods and services.

“We have not seen the worst yet,” said Iris Pang, Greater China economist at ING Bank NV in Hong Kong. “For the rest of the world it begins with a bilateral trade war between the U.S. and China but it would not end with a bilateral impact. Global supply chains, shipping companies, foreign investment hurdles from the U.S. government at the same time as China pledges to welcome more foreign investment will change global business flows.”

China’s Trade Surplus With the U.S. Just Keeps on Growing

If the U.S. goes ahead with tariffs on $250 billion, the hit to China’s growth could mean a drag of 0.3 percentage point, according to Morgan Stanley. There’s also the risk of an indirect hit to China arising from supply chain complexities which could subtract another 0.3 percentage point from growth.

To be sure, China has means to respond given the massive fiscal and monetary firepower available to policy makers. Spending by China’s government jumped in June, underscoring efforts to stabilize growth. The PBOC is expected to cut its reserve ratio requirements again this year, unleashing locked-up liquidity.

They may need to deploy more of that firepower.

“The trade wars are going to get worse,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “It’s bad news for China, and for all of us.”

[“Source-bloomberg”]