A cargo ship at a port in Qingdao in China's eastern Shandong province. Photo: str/Agence France-Presse/Getty Images
China is well-known as a resting place for state-owned corporate zombies. Recently, it’s the privately owned export sector that has been fighting for survival: President Trump’s tariffs have put a big target on its back.
Except, maybe not. September trade data released Friday showed the Chinese economy in surprisingly decent health—particularly set against this week’s dismal Chinese markets action. Overall export growth accelerated to 14.5% on the year from less than 10% in August, with even export growth to the U.S. picking up speed. Import growth was less rosy, slowing to 2.8% from nearly 8% in August in volume terms, estimates Louis Kuijs at Oxford Economics.
Still, with housing prices rising and output of key industrial goods robust, there is little sign of collapse. The biggest danger for China now might actually be over-easing.
Strong exports may partly be about companies trying to front-run U.S. tariffs, but analysts have been telling that story for months. A more likely explanation is that a cheaper yuan and U.S. fiscal stimulus–which tends to boost imports–have outweighed the modest tariff effect so far. Moreover, while global growth is slowing, it remains strong. The International Monetary Fund cut its 2018 global growth forecast this week to 3.7%, the fastest rate since 2011 excluding last year. Notably, the IMF held its 2018 U.S. and China growth forecasts steady.
On the import side, it’s clear China’s demand is slowing–but not yet drastically. Auto sales have disappointed, weighed down by expiring tax incentives, but the labor market appears to have tightened in recent months, a potential boost for incomes and consumption.
The major risk for China right now might not be the trade war, but instead that policy makers overreact by stimulating too much. China has pushed 10-year government bond yields down significantly since late 2017. The yield premium investors get for owning comparable Chinese debt rather than 10-year Treasurys has in recent days hit 0.4 percentage point, the lowest since 2011.
With the yuan flirting with seven to the dollar and traders betting it will fall further, more large-scale easing looks risky, particularly with the housing market so bubbly. If that bubble bursts or the yuan falls too far, much bigger capital outflows still seem likely to reappear.
That would be a much bigger problem for China than what has, so far, proven to be a manageable trade conflict.
Write to Nathaniel Taplin at [email protected]