Great Wall of China ()
The U.S. economy grew at a sluggish 0.7 percent during the past three months, as consumers refrained from purchasing big ticket items to create a larger savings cushion. It marked the weakest quarter in nearly three years and puts President Trump’s growth goal of 4-5 percent increasingly out of reach. Above all else, the feeble headline number impacts the United States potential course of action with other major markets, namely China.
Only weeks earlier, the world’s second largest economy roared back to the forefront, clocking in 6.9 percent growth for the first quarter and handily topping initial expectations of about 6.5 percent. The tantalizing figure curbs fears of a China slowdown spiraling out of control but also prompted economists to lift global growth estimates for the remainder of the year. Provided relations with the United States continue to improve and China can see significant gains in housing, infrastructure investment, exports and retail sales as it did in the past 3 months, the Chinese economy should show no signs of cooling down.
U.S., China Relationship
During the campaign trail, the Trump administration vowed to take a tougher stance on China with regards to trade and what they believed to be currency manipulation. But after a seemingly productive meeting with the President Xi Jinping of China, that resulted in zero diplomatic breakthroughs, the President’s tone has curiously softened. Ultimately, the two superpowers must still find common ground on key economic and foreign policy issues to form a lasting bond.
The current economic relationship between the U.S. and China primarily involves trade; totaling 115.78 billion in imports received from the United States and nearly 462.81 billion sent in exports during 2016. China represents the United States biggest trading partner, but also one of the country’s largest creditors, holding just north of $1 trillion in U.S. debt.
That number tailed off sharply in recent months as China looks to unload a greater number of Treasuries and prop up the value of the yuan. Therefore, the current uproar over currency manipulation seems to fall contrary to fact or reality. That said, the threat of a trade war or tariff slapped on Chinese imports would have severe consequences for Chinese manufacturers and likely strain relations among the countries.
As of now, the Trump administration has chosen to back off some of its core campaign promises with the hope that China will aide in taming North Korea. Over the weekend the President claimed the North Korea dilemma trumps renegotiating trade agreements with China. With issues of trade and currency currently on the backburner, China’s prospects of high 6 percent growth for 2017 remain intact.
Strengths
China, itself, is in the midst of a major structural shift away from manufacturing, commodities and export-led growth towards a service and consumer driven model. In other words, rising wages and living standards continue to buoy discretionary spending and housing investment that powered 6.9 percent growth in the first quarter. The government remains dedicated to sustaining this trend and recently announced it would roll back taxes by $55 billion in a bid to support additional spending and growth. This boon also supports the country’s massive infrastructure bill, which provides companies with the necessary capital to expand.
Outside of serving native Chinese companies, the rise of consumerism benefits many multinational corporations. Honeywell (HON) and Caterpillar (CAT) both rolled out upbeat outlooks this earnings season on the prospect of continued growth in China. Economists are hopeful that some combination of a red-hot property market, infrastructure investment, exports and retail sales can support a steady flow economic data.
Weakness
China’s headline GDP number may have quieted skeptics who were ready to write the country off, but the key question is still about sustainability. Growth in China traditionally relied on heavy investments and credit growth, with the biggest buildup of leverage going to state owned enterprises. That creates vulnerabilities in China’s model that becomes evidently clear in the stock market, which has a track record of making drastic moves.
Progress to reduce this overreliance on credit has been tepid, despite the county’s best efforts to shift to consumer led growth. Provided credit growth drops to a moderate level and GDP continues to grow at its current pace, the need to address the situation will be less urgent. But that isn’t entirely simple if authorities retreat to old practices to prop up the economy when all else fails. Other near term concerns tied to China’s rebalancing efforts include enduring growing pains of the transition from industry to service led growth, pollution, inequality and falling savings. Having said that, slower than expected growth in the manufacturing sector for the month of April suggest recent attempts to deleverage have started to work.
Final Take
China’s recent rebound comes as a surprise to many economists who repeatedly called for a drop off after decades of light speed expansion. For now, the uptick is a welcome boost to the global economic outlook that has slowly trudged higher in the aftermath of the global financial crisis. But in order for it to continue, China must balance key economic relationships with developed markets like the United States with its ongoing transition to consumption driven growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
