China’s economy is getting worse. That makes a trade deal more likely

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Container trucks arrive at the Port of Long Beach on August 23, 2019 in Long Beach, California. - President Donald Trump hit back at China on August 23, 2019, in their mounting trade war, raising existing and planned tariffs in retaliation for Beijing's announcement earlier in the day of new duties on American goods. (Photo by Frederic J. BROWN / AFP) (Photo credit should read FREDERIC J. BROWN/AFP/Getty Images)

China’s economic slowdown keeps getting worse. That could give the country incentive to repair its trading relationship with the United States and take more steps to stimulate its economy.

The country released data Monday that showed industrial production — an important indicator for China’s economy — increased by just 4.4% in August compared to a year earlier.

That’s worse than the sector’s performance in July, when it grew by 4.8%, its weakest growth in 17 years.

Industrial production is important because it measures the output of key businesses in China’s manufacturing, mining and utilities sectors. The latest figure was also worse than the 5.2% growth that analysts polled by Reuters expected.

Other data released Monday by China’s National Bureau of Statistics was also poor. Retail sales growth slowed to 7.5% in August, down from July’s 7.6% year-on-year uptick.

The world’s second biggest economy has been struggling because of its trade war with the United States. It’s also facing domestic challenges as it tries to rely less on debt to fuel growth.

The new data comes as China’s tense trade relationship with the United States appears to be improving, at least a little bit. China announced last week that it would exempt American soybean and pork from tariffs. That was the latest in a series of steps taken by both countries to cool off ahead of a new round of trade talks.

The soft August figures reflect an “increasing downside risk to the economy” as the trade war rages on, said Ken Cheung Kin Tai, chief foreign exchange strategist for Asia at Mizuho Bank in Hong Kong. “Against this backdrop, it makes sense that China softened its stance on trade talks” and introduced stimulus plans in recent weeks.

The weak data also fuels speculation about how China’s central bank will continue responding to the slowdown, Cheung added.

The People’s Bank of China has taken several steps in recent weeks to boost the country’s economy. Earlier this month, it reduced the amount of cash banks have to keep in reserve by slashing the reserve requirement ratio for the first time in eight months.

And in August, the central bank launched a new Loan Prime Rate that will become the benchmark for banks to price loans, a reform meant to support growth and employment. It is fixed monthly. Cheung said Chinese policymakers could fix that rate lower when it is set later this week.

China has also allowed the yuan to depreciate to its lowest levels in more than a decade in recent weeks. But a weaker currency isn’t likely to completely offset problems with tariffs and sluggish global demand, said Martin Lynge Rasmussen, a China economist for Capital Economics. He said in a Monday research note that China will likely keep easing monetary policy in the coming months.

Tommy Wu, a senior economist for Oxford Economics, also said the country needs to take significant steps to stabilize growth. His firm forecasts the economy will grow 6.1% this year and 5.7% in 2020.

The People’s Bank of China could consider a cut to its medium-term lending facility rate, which is a key loan rate, said Ting Lu, chief China economist for Japanese investment firm Nomura. He also expects the government to loosen restrictions on the property sector later this year to help stimulate purchases.

Chinese officials have said they have enough tools available to bolster the economy.

“The Chinese economy is facing certain downward pressure from slowing global growth, protectionism and rising unilateralism,” said Chinese Premier Li Keqiang in an interview with Russian media, according to a transcript published Monday by the Chinese government. “But the economy also has big resilience, potential and enough space to maneuver.”

Source: CNN – China’s economy is getting worse. That makes a trade deal more likely

Tony Simon

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