Are China’s problems more structural in nature?
As we’ve seen previously in this series, Chinese authorities have initiated a number of measures to arrest the apparent slowdown in the economy. Most of the market participants, however, are of the view that China can’t engineer a sustained rise in the economy with policy tweaks. The country tried a number of these policy stimuli in 2018, but they weren’t able to stabilize the economy is any significant manner. The issues with the economy now are more structural in nature.
Structural issues such as cost competitiveness
According to ANZ Research, China’s slowdown is structural. It says, “China’s labor force continues to contract, and the trend seems irreversible.”
As we highlighted in Citigroup: Trade War Damage in China Is Already Done, Citigroup economists think that the damage to the Chinese economy is already done. Citi (C) argues that the tariff war led to increased labor costs in China (FXI). The job market is under pressure. Economists estimate that the ongoing trade war could cut China’s export growth by almost half in 2019, which would put ~4.4 million jobs at risk. Citigroup economists also stated that China is losing its cost competitiveness, especially in labor-intensive sectors.
Deflation is a bigger concern
Instead of inflation, deflation is turning out to be a bigger concern in China as consumer demand is weakening. China Beige Book’s managing director said, “Consumer demand has weakened, and you see that reflected in retail and services prices.” This deflation is now becoming more apparent, and the latest batch of soft inflation data has fueled concerns about a structural slowdown.
As far as trade war is concerned, it is even in the interest of the US (QQQ) (SPY) to resolve it, as many US companies including Amazon (AMZN), Walmart (WMT), and Alphabet (GOOG) have also been opposing the tariffs due to the negative impact on their financials and outlooks.
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