Money & Markets | opinion

7 reasons Trump is wrong about China's economy and why it will make it through the trade war just fine

Picture: Getty Images

  • Even with the wildly low expectations heading into its release, last week’s China’s December trade report was a horror show, Business Insider Australia’s David Scutt wrote.
  • Then on Monday, China announced its official GDP came in at 6.6% for 2018, the slowest pace of growth since 1990. This was music to the ears of US President Donald Trump who triumphantly tweeted that it made sense now for a battered China to make trade-war concessions.
  • But compared to 30 years ago, this is a brand-new Chinese economy, under shiny new management.
  • Winning a trade war with China is not as easy as tweeting about it.

Even with the wildly low expectations heading into its release, China’s December trade report was a horror show.

With a US-China trade war in full effect, the value of China’s exports and imports imploded by 7.6% and 4.4% respectively from a year earlier, well below market expectations.

“Underlining just how weak the result was, the year-ended percentage decline in both exports and imports was the largest since the second half of 2016, another period when concerns about the Chinese economy were acute,” Business Insider Australia’s David Scutt wrote.

Then on Monday, China announced its official GDP came in at 6.6% for 2018 – the slowest pace of growth since 1990.

US President Donald Trump took note. Perhaps with an eye to generating concessions out of the ongoing trade war. Trump said this week that it “makes so much sense for China to finally do a real deal,” and stop – as he put it – “playing around.”

But with the China hawks circling, The Economist encourages a closer look at the world’s second-largest economy to better understand why Chinese President Xi Jinping and his economic management team are a good deal calmer than Trump is imagining.

Here are 7 sensible reasons that China is not about to fall over in the face of US tariffs, tweets, or a trade war.

1. It’s a question of scale

China wealth economyJOHANNES EISELE/AFP/Getty ImagesThis picture taken on October 20, 2018 shows Chinese riders and their horses taking part in a performance in the show hall of an equestrian-themed town in Jiangyin, Jiangsu province, some 200 kilometres northwest of Shanghai.

With an economy now of gargantuan proportions, even at its weakest in 30 years, China’s slower growth last year still generated a record amount of new production. Nominal GDP increased by eight trillion yuan, according to The Economist.

The maths is simple: China’s economy has been growing in double digits for decades; that means its growth in the present day is coming off a much, much larger base than 2007, when it grew at 14.2% but generated around 3 trillion fewer yuan than 2018’s derided 6.6%.

2. China is now a much more self-sustaining economy

China consumption hello corgiSTR/AFP/Getty ImagesThis photo taken on December 18, 2018 shows a customer holding a corgi at the Hello Corgi Cafe in Shanghai. – Welcome to Hello Corgi Cafe, the latest coffee shop in China populated with pets that clients can caress while drinking coffee or tea.

A few years ago when China largely made things cheaply and sold them overseas cheaply, a trade war would have been devastating. And while US tariffs still smart, the fall in exports that Scutt called a horror show are less of a bloodbath now than ever before.

So while the trade surplus is slipping, domestic demand easily accounted for the half-per cent loss. Domestic consumption, as promised, has been driving Chinese growth; in 2018, it accounted for three-quarters of the growth, the most since 2000, The Economist says.

3. Debt is no longer a secret word

China economy propagandaGREG BAKER/AFP/Getty ImagesPeople walk past a propaganda billboard which reads ‘Patriotism, Innovation’ at the entrance to a subway station in Beijing on October 19, 2018. – China’s economy grew at its slowest pace for nine years in the third quarter, as a campaign to tackle mounting debt, and trade frictions with the US take their toll. The world’s second largest economy expanded 6.5 per cent on-year in July-September, National Bureau of Statistics figures showed, in line with an AFP survey, but marking the worst performance since the start of 2009 at the height of the global financial crisis.

China’s financial system remains troubled, but it’s a mess that is being openly discussed and not hidden in the shadows.

Xi Jinping’s government is the first to try and resolve the debt that has risen dramatically in the decade since the Beijing Olympic games.

Debt-to-GDP levels are still rising, but deleveraging was never Xi’s goal. That can wait and may be part of an eventual re-nationalization of certain industries. What Xi craves is stability.

The Economist reckons China’s pace of debt accumulation has slowed sharply. “In 2015 it took more than four yuan of new credit to generate each yuan of incremental GDP. In 2018 that multiple fell to 2.5, in line with China’s average over the past 15 years.”

4. Growth that is in for the long haul

Wang qishanJason Alden/Bloomberg via Getty ImagesWang Qishan, China’s vice president.

China’s vice-president Wang Qishan has waved away the fears that decades of break-neck growth was always unsustainable, particularly in the face of a US trade war.

“There will be a lot of uncertainties in 2019, but one certainty is that China’s growth will continue and be sustainable,” Wang told the World Economic Forum in Davos, which leads us to China’s ace-in-the-hole.

5. Growth that is stage-managed

China stage economyGREG BAKER/AFP/Getty ImagesAttendants pose for photos in Tiananmen Square as they wait for delegates during the opening ceremony of the 19th Communist Party Congress in Beijing on October 18, 2017. The Chinese Communist Party opened its week-long, twice-a-decade congress in the Great Hall of the People on October 18.

When Wang says that the Chinese Communist Party will pull out all the stops to maintain the many years of growth China has enjoyed since the 1980s, he knows it’s true. China’s government and its economy are stage-managed by the same team. When the stock market moves in the wrong direction, the Party has never been too shy to get involved.

6. Actual tax cuts

China small biz young animatorsZhang Peng/LightRocket via Getty ImagesTIANJIN, CHINA – 2018/08/09: Young people are working in an open office space, which is a cartoon and animation company. The working space is specially offered by Tianjin Binhai New area for the start-up enterprises.

This year, for example, the government says it will step up fiscal spending to buoy the economy. There is strength enough to deliver further tax cuts and assistance for small business, finance ministry officials told Reuters on Wednesday.

Beijing delivered about 1.3 trillion yuan of cuts in taxes and fees in 2018.

7. Inspired consumption

China singles miranda kerr(Photo by STR / AFP)Australian model Miranda Kerr attends the 2018 Tmall 11:11 Global Shopping Festival gala in Shanghai on November 10, 2018, ahead of the annual November 11 Singles Day shopping spree – China’s answer to Black Friday – which saw 25 billion USD spent in just one day last year.

Consumption in China looks less promising this year, according to The Economist.

“The middle three quintiles of China’s population by income distribution saw earnings increase by only about 2% last year in real terms. Those of the richest quintile rose by 6.6%.” Car sales fell last year for the first time in more than two decades. Even mobile phones sales were”sluggish.”

But while China brings in a slew of supportive economic policies (like tax breaks) and a stimulus forever on stand-by, the fact is rousing the Chinese consumer for a spree of patriotic spending can be done at the drop of a hat. Or in this case, the word of a president.

One need only look at Jack Ma’s Singles Day to understand what can be done when the political and the economic align in today’s China.

Trump would do well to consider the previous 30 years of unbroken Chinese growth before he goes into negotiate with a China he imagines has its back against a wall.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.