Donald Trump says he is really happy that Chinese growth is the slowest it has been for 27 years but Australia should be worried – very worried.
With annualised quarterly GDP growth slowing from 6.4% in the first three months of the year to just 6.2% in the June quarter, the signs are ominous that the Trump trade war and continuing slow economic activity in much of the rest of the world are really hitting the brakes in China.
While China’s growth is still impressive compared to much of the rest of the industrialised world, the slowing trend is of concern when you compare it to the 6.6% last year and 6.8% in 2017.
It is true that the Chinese economy is much larger now than it was a couple of years ago so that even slower growth still provides plenty of momentum in terms of Australia’s bulk commodity exports such as iron ore and coal.
Terrible timing for a slowing Australia
However, with Australia still stuck in a slowing growth trend of its own, the timing is terrible.
Australia is very closely linked to China’s fortunes given that it is our largest trading partner and we will certainly feel the pain if Chinese growth were to slide closer towards 6% over the rest of the year.
What makes this slow down more worrying for Australia is that China is now saddled with significant debt from previous measures to stimulate its economy so there is little chance of a repeat of that happening.
High debt levels reduce chances of Chinese stimulus
Indeed, China has been working hard to correct the excessive levels of debt caused by the post-GFC stimulus efforts, which have left it with an estimated debt-to-GDP ratio that is closing in on 300% if you include state-owned enterprises.
The country’s stimulus actions for the trade war so far have been much smaller and more targeted, such as the People’s Bank of China loosening reserve requirements for banks and the lowering of some taxes and fees.
None of that has overcome the effects of the Trump trade tariffs, which has seen quite a lot of manufacturing that would have happened to China redirected to countries that will not be part of the Trump tariff moves.
US businesses have been particularly quick to diversify away from China, in case they get caught in the crossfire from the trade war.
Trade talks still crucial but going nowhere
Then there is the central issue of what will continue to happen with the US/China trade talks, which are delicately poised at the moment.
The Trump administration has already raised tariffs on US$250 billion of China’s exports to the US in May and came close to adding tariffs to another US$300 billion.
That has been stalled for now after President Trump deferred the extra tariffs at the G20 leaders’ meeting.
That has allowed negotiations to continue between China and the US but there is no sign yet of a breakthrough in the talks so a large expansion in the tariff program is still a likely result.
Adding to the pressure is the chance that President Trump could still widen his trade wars to Europe and elsewhere.
Tariffs already biting for China
Already, the tariffs are hurting China with both exports and imports falling, with the 7.3% fall in imports in the last month particularly severe.
Australia can really only watch and hope as the world’s biggest economy – the US – does battle with the second biggest – China – with every chance that the third major economic group of the Eurozone could well be sucked into the trade war as well.
As an open trading country, we are particularly suited to the previous relatively open world trading regime but the rise of protectionist measures leaves us exposed.
We are price takers rather than price makers and any further slowing in world economic activity will be felt keenly in Australia, particularly given our current growth is already sluggish and slowing.