The China economy is starting to show signs of stress expressed in factory activity shrinking a 3-year low in February and exports seeing their worst orders in a decade. More specifically, these export orders have fallen to their lowest level since the financial crisis of 2008, showing a deepening worrisome situation as the economy seems to be slowing both internally an externally (lack of overseas interest).
We at Classiarius feel that the China economy is not going to recover anytime soon, making the trade talks somewhat isolated in their potential impact – unless a shockingly good result is announced. Trade talks will not deliver on promises but the White House will continue to push China in the direction it wishes.
But we must keep in mind that in China, social policy has a significant employment component built in. Increasing unemployment is a concern as it can quickly become a political football or worse. President Xi and his group of Communist educated leaders all know that it was massive unemployment and the social unrest that comes with that swept the Party into power. Currently factories near Beijing are running, in some cases, at 70% capacity. What does the Party do it unemployment rises to 10% or 20%? Mao understood this and Xi clearly understands this risk.
After growth last year in China fell to a 30-year low, there is growing concerns that the world’s second largest economy is slowing at a much faster pace than thought even two months ago. The sharp slowdown could be triggered into a free-fall if in fact President Trump applies too much pressure to trade talks in the form of much higher tariffs on a wide range of goods.
China official Purchasing Managers Index or PMI fell for a third straight month to 49.2 in February, down from 49.5 in January. These figures were released by the National Bureau of Statistics. The 50 mark separates the expansion and contraction of PMI activity.
Despite Beijing expanding support measures, factories near the capital continue to reduce workers. Currently, GDP is expected to fade in the first half of 2019, possibly below 6 percent. Growth faded to 6.4 percent in 2018, the slowest expansion in three decades.
President Trump has proclaimed that the US and China will announce a deal that would end the trade war, if the two sides can bridge their differences. US Trade Representative Robert Leigthhizer has said that the issues between China and the US are “two serious” and this implies that there will not be a significant change in trade in the coming weeks or months. This view is in line with our Classiarius view – nothing will change or more like nothing can change.