The weakness in China's economy 'has nothing to do with the trade war'

(Thomas Peter-Pool / Getty Images)
  • Donald Trump’s trade war with China has been one factor weighing on China’s stock market this year.
  • But Macquarie Bank economists say it’s yet to have had any drag on the broader Chinese economy.
  • Economists Larry Hu and Irene Wu said any weakness was primarily due to domestic crackdown on excessive leverage.
  • They added that if credit tightening leads to further slowdown in growth, China’s central bank may cut interest rates.

Chinese stocks were the talk of markets last week, as the Shanghai Composite slumped to a four-year low.

It prompted a coordinated response from key policymakers on Friday, which sparked a sharp rally to end the week that has extended into Monday trade.

However, the multiple threats which dragged on stocks this year — risks of a property bubble, a crackdown on shadow banking and the ongoing trade war with the US — haven’t gone away.

But when it comes to Trump’s trade war, Macquarie Bank says a distinction needs to be drawn between its effect on Chinese stocks and the country’s broader economy.

“To be clear, unlike the stock market, the weakness in the Chinese economy so far this year has nothing to do with the trade war,” said economists Larry Hu and Irene Wu.

Instead, they pointed to China’s ongoing deleveraging campaign as the primary catalyst.

Following a pledge by President Xi Jinping last October to reduce the risks in China’s financial system, authorities have continued their crack down on the buildup of “shadow” debt that Chinese companies and local governments don’t report on their balance sheet.

Official Chinese data last week showed showed China’s annual economic growth slowed to 6.5% in the September quarter.

While the headline result was broadly in line with China’s annual target, Q3 GDP still missed forecasts for the first time in three years.

And the two Macquarie economists said the fallout from the credit crackdown could extend into 2019.

“Looking ahead, due to the lagged impact from the credit tightening this year, the Chinese economy could slow to 6.2% in 2019 and policy makers might have to set a lower growth target for next year.”

So far though, China’s exports have held up well, “partly due to the front-loading in anticipation of higher tariffs”, the pair said.

So for now, the threat of an all-out trade war with the US hasn’t contributed to a slowdown in China’s economy.

It may become a factor though, if the US goes ahead with its threat to place tariffs on the entirety of China’s US exports.

However, Hu and Wu said investors should be aware that China has some policy options available to spur growth if need be. In particular, keep an eye out for rate cuts.

“For the stock market to bottom out, the most important thing is not a rebound in the economy, but an escalation of stimulus,” they said.

China’s Q3 GDP growth remained in line with the government’s target, which means “it’s still premature for stimulus to escalate”.

However, recent commentary from the governor of China’s central bank, Yi Gang, “made it clear that a benchmark rate cut is an option”.

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