Global stocks swooned early this week amid the introduction of new tariffs by both sides of the trans-Pacific rift. Washington imposed duties on $112bn (£92bn) of Chinese consumer imports including shoes, nappies and food. Beijing started applying tariffs on $75bn of US products, including a 5% charge on crude oil imports. By the end of the year there will be levies on “nearly everything that comes to the United States from China”, say Quoctrung Bui and Karl Russell in The New York Times. This year’s tariffs will raise prices and leave the average American family around $460 worse off.
A small stimulus
China’s economy is feeling the pain too, says Freya Beamish in a Pantheon Macroeconomics note. Surveys of manufacturing activity have still to show signs of a recovery and the country’s services sector may yet “catch a cold”.
Economists have been cutting their China growth forecasts for next year, notes Bloomberg News. Most now expect GDP to grow at less than 6% in 2020. In the second quarter China’s GDP expanded at an annual rate of 6.2%, its slowest pace in 27 years. Yet fearful of inflating new bubbles, “officials have stuck doggedly to a relatively limited roster of stimulus measures”, such as tax cuts.
It is easy to see why. Data from the Institute of International Finance shows that China’s debt-to-GDP ratio breached the 300% level in the first quarter of this year. Total corporate, household and government debt rose to 303% from 297% a year before. “China is very much past the tipping point where the debt simply can no longer can be ignored,” analyst Fraser Howie told CNBC.
Playing the long game
All the signs are that past “fiscal and credit binges” will not be repeated, says Michael Mackenzie in the Financial Times. During moments of global uncertainty in 2009 and again in 2015 it was China that rode “to the rescue”. Yet policymakers are now concentrating on the “structural challenge” of trying to wean the country off an export and infrastructure-led growth model. The moment for China to trigger “another synchronised global upswing has passed”.
China’s leadership has instead settled on a policy of “toughing out trade tensions”, says Andrew Batson for Gavekal Research. “Monetary and economic policy is almost ostentatiously calm,” despite Trump’s provocations, with no plans to ease lending conditions radically. Authorities are also clear that they will not stimulate the overheating housing market. “The closer the US presidential election gets, the less incentive China has to deliver Trump any reward for the trade war.”