China’s economy is getting deeper into trouble. According to the estimates released last week, the growth in the quarter ending in September fell to 6 per cent, lower than the 6.2 per cent for the preceding quarter, and the 6.1 per cent projection by observers and experts. This is the slowest growth rate witnessed by China in the last three decades.
The slowing growth is worrying for President Xi Jinping for two reasons. One, it threatens to push the growth below the 6 per cent mark in this quarter, thus putting additional pressure on markets at home and across the globe. Two, it begs the billion-dollar question — is President Donald Trump winning the trade war?
While one may jump the gun and attribute China’s slowing economy to Trump’s tariff tweets, the reasons for the faltering economy are many.
One, China is no longer the world’s most desired manufacturing destination. Before Trump took to Twitter to suggest companies must move their supply chains out of China, the wages in the country were already on the rise. Between 2013 and 2019, the index for average monthly wages registered an increase of 60 per cent.
Recently, Samsung moved its smartphone manufacturing operations out of China, and will now have its biggest plant in Noida, India. While competition from domestic mobile phone manufacturers did hurt Samsung’s interests, the lower wages in India were also taken into consideration.
Vietnam is another beneficiary of the growing Chinese wages. The country may witness the export of goods and services surpassing its gross domestic product (GDP). Clearly, the country has benefited from the US-China trade war. However, the movement of the supply chains out of China hurts employment prospects in the country, thus hampering consumption and demand.
Two, the infrastructure boom is about to come to an end. China, after the 2008 crisis, has gone on a building spree as evident from its investments in high-speed railway networks, new cities and highways. However, the party is coming to an end here.
Already, China’s ghost cities are attracting spirited observers from across the globe. The real estate projects are collapsing under their debt as demand weakens. While having banks controlled by the state enables China to cover these debts, the strains in the infrastructure sector are now visible, even with opaque data.
From over 40 per cent in 2016 to less than 20 per cent in 2019, capital formation in China which includes infrastructure investments, both national and local, has been on the decline. China’s crackdown on the informal lending sector, peer-to-peer lending platforms, and restraining credit options have also added to the woes of the infrastructure sector.
The impact of this is being felt on the employment, manufacturing, and industrial front. A reduction in real estate projects directly impacts the industries from where raw materials are procured, labour costs, and the need for roads and railway networks. All this, eventually, boils down to weak consumption and demand.
Three, the impact of falling exports and trade war is now being felt in office occupancy rates. According to a report in the Financial Times, China’s office market is witnessing the largest vacancy rate since the 2008 crisis. From 16.7 per cent in third quarter (Q3) of 2018, the vacancy rates are now more than 20 per cent for Q3 of 2019. As compared to 2017 (Q1-Q3), the supply of new office space has fallen by a third.
The office vacancy rate in Shanghai was 18 per cent, up from less than 15 per cent last year. Across the 17 major cities monitored, the vacancy rate stood at 21.5 per cent, not alarming but not comforting either.
The vacancy rate, or a part of it, can be attributed to the trade war with the US. Given the two nations are yet to reach a formal agreement on countless issues related to trade, global companies are restraining themselves from investing in China. A truce with the US will result in a spike in occupancy rates.
Four, the capital injection. China, this year, has been on an injection spree. However, given the opaqueness in relations between the banks and the state, the injections are not similar to what one may witness in the US or India. Yet, they are alarming, given their size.
Firstly, China made a $28 billion capital injection into its banking system last week. This was probably due to the realisation of weak GDP growth which came later. This injection came a little over a month after China cut banks’ reserve ratio, thus indirectly adding another $126 billion for lending.
Together, China injected more capital in its economy in the last two months than the US did right after the fall of Lehman Brothers in 2008 under the TARP plan. In August, the central bank of China replaced its main lending rate with a market-driven loan prime rate, thus lowering the cost of borrowing.
Lastly, Huawei. While the telecom giant can be termed as a pawn in the trade war between the two countries, it does reflect the impact the trade spat has had on companies looking to please both sides of the Pacific.
According to a recent , Huawei’s senior officials admitted that while they were able to replace the hardware they procured from the US companies, they were struggling with replacing the computing services offered by Google.
However, this trouble is temporary, for Huawei, even with the US sanctions in play, has been able to register a 27 per cent growth in revenues, and would soon create a Google-like ecosystem for its mobile services.
The fault lines in China’s economy, especially on the wages, infrastructure, and credit front were beginning to show even before Trump launched his first set of tariffs. While the current slowdown in China’s economy was expected, given its increasing size and nature, the volatility caused by the trade war is hurting in places.
Trump, even with his noble intentions to get the Chinese play by the rulebook, cannot be credited with the slowing economy in China. However, while his tariffs may not be the fire burning through Xi Jinping’s political and China’s economic capital, they surely add to the trouble.
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