For China the Year 2019 has begun with the news that a key manufacturing index recorded its worst reading in 19 months—another sign that the Chinese economy is starting to slow. There are fears that it will be further adversely impacted if no trade agreement is reached with the US by the deadline of March 1 and Washington proceeds with its threat to lift tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent.
The worsening outlook for the Chinese economy was highlighted by the Caixin Purchasing Managers Index (PMI), mainly tracking privately-owned factories, which fell to 49.7 in December from 50.2 in November. It was the first time since May 2017 that the PMI fell below 50, which marks the line between expansion and contraction.
The data on the private sector was published two days after China’s official PMI, which mainly tracks state-owned corporations, came in at 49.4, the first time it has fallen below 50 since July 2016.
In both indexes new orders fell from expansion to contraction between November and December. Other Chinese data point in the same direction. In November profits of industrial companies fell for the first time in three years and the growth in retail sales was at its lowest level in 15 years, with the auto industry particularly hard hit.
According to the global consulting firm PwC, China has the capacity to produce 43 million vehicles as a result of large investment by Ford, Peugeot, Hyundai, Volkswagen and other major car producers but will build fewer than 29 million.
The manufacturing downturn, according to the Wall Street Journal (WSJ), is a “sign that nine months of monetary easing by the central bank has failed to boost lending in the real economy, though it has succeeded in pushing government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic.”
The banks are continuing to lend, but to other financial institutions and not to “the cash-starved companies that really drive growth.”
Besides the slowdown in manufacturing, the whole economy is being threatened by an escalation of tariffs.
Seeking to provide a boost to the battered US stock market, Trump issued a tweet last weekend that he had talked with Chinese President Xi Jinping and “big progress” had been made in trade discussion. A deal, if made, he tweeted, would be “very comprehensive, covering all subjects, areas and points.”
However, the key issue remains how far China will agree to US demands that it cease alleged theft of intellectual property rights and wind back, if not entirely eliminate, subsidies to state industries which the US claims are “market distorting.” These issues will be at the centre of talks between leading trade representatives of both countries.
China has already agreed to boost its imports of US products in order to address the trade imbalance between the two countries. But this is regarded as insufficient by the anti-China hawks within the Trump administration who see its industrial development, especially in high-tech areas, as a threat to the global economic and military dominance of the US.
Trump attempted to provide a further boost to the markets in a tweet on Jan 2. He said that the US stock market had suffered a “little glitch” in December and would recover once he had negotiated trade deals with China and other countries. The market appeared to respond, adopting a wait-and-see approach when trading began for the New Year, with the Dow recovering to finish marginally up after falling by almost 400 points at the opening.
The trade conflict with China and its worsening growth prospects are not the only factors impacting on the world economy. The latest indications are that growth in both Germany and France is slowing. There is continuing uncertainty over the terms of British withdrawal from the European Union amid warnings that a “no deal” Brexit will have major economic and financial consequences.
Trade is also a point of conflict between the US and the EU. Under a deal struck between Trump and European Commission President Jean-Claude Juncker in July the US agreed to put threatened auto tariffs of 25 percent on hold in return for negotiations on tariff reductions and other trade constrictions.
However, there has been little progress in the discussions, with a leading EU trade representative accusing the US of undermining the July agreement.
The year 2018 was marked by slowing growing global growth, increased financial turbulence, trade war and tariff measures. The New Year has opened with clear indications that all these conditions are set to intensify.
——By Nick Beams