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NEW HAVEN: The administration of US President Donald Trump has underestimated China's resilience and strategic will. With the slowdown in the Chinese economy, the United States believes that China suffers and is desperate to end the trade war.
But with enough leeway to cope with the current slowdown, Chinese leaders must not abandon their long-term strategy. While a cosmetic agreement focused on bilateral trade seems to be under consideration, the sharp contrast between the fundamentals of the two economies suggests a very different verdict as to who has the upper hand.
MODERATE GROWTH IN CHINA
Yes, the Chinese economy has significantly weakened in recent months. But contrary to what the United States thinks is due to the success of its pricing strategy, the slowdown in China has largely inflicted itself.
It was first provoked by a debt reduction campaign aimed at neutralizing the growing risks of debt-intensive economic growth.
To their credit, Chinese policymakers have taken drastic action to avoid the dreaded Japan Syndrome – not only overindebtedness, but also a profusion of zombie companies and the resulting productivity problems.
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US RATES STARTING AT DEATH
Meanwhile, the effects of US tariffs are just beginning. While exports to the United States declined by about 3% in December 2018 and January 2019, shipments to the rest of the world continued to grow, largely due to the resilience of emerging markets, in particular from Asia.
To the extent that exports were probably ahead of the Lunar New Year holidays and future increases in US tariffs, we can expect some declines. While this may moderate short-term prospects, it is difficult to attribute the slowdown in exports in recent months.
To cover its risks, China was quick to exploit its intrinsic advantage: far greater political flexibility than Western economies, which far exceeded their limits in terms of fiscal and monetary stimulus.
The reduction in reserve requirements five times in the past year has led to an increase in bank lending and an acceleration of credit growth in early 2019, which should help improve overall economic activity. from here the middle of the year.
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In contrast, the US economy is more a story of short-term dynamics. Thanks to the exorbitant tax cuts at the end of 2017, economic growth has accelerated to around 3% in 2018, nearly one percentage point higher than the 2.2% anemic pace. from the previous eight years.
However, with the gradual disappearance of fiscal stimulus, GDP is expected to follow the same growth – in line with the latest congressional budget office forecast of 2.3 percent growth in 2019.
CONTRASTING ECONOMIC PERFORMANCE
The risks of an even lower result are increasing. The rebound in US equity prices in early 2019 did not offset the sharp decline of the end of 2018, which weighed heavily on household wealth and consumer confidence, resulting in an inordinate decline in retail sales. in December.
As the number of unemployed job applications begins to rise, the housing sector is already weak, the global economy is on increasingly fragile ground and the Federal Reserve has limited ammunition, resilience of the US economy seems more and more fragile.
The likelihood of contrasting economic growth trajectories – a policy-induced improvement in China and a policy-driven slowdown in the US – reinforces a deeper imbalance in long-term fundamentals.
In 2018, China's domestic savings rate, which accounted for 45 percent of GDP, was nearly two-and-a-half times the US rate of 18.7 percent. Although China's savings rate has fallen from its 2008 peak of 52 percent, with consumer-driven rebalancing pushing from excess savings to savings absorption, there is still a shock absorber for which the United States would die.
In addition, 85% of the US gross savings are spent replacing the obsolete and depleted capital stock.
After adjusting for depreciation, the United States had a net national saving rate of barely 3% in 2018, less than half of the 6.3% average recorded during the year. the last three decades of the twentieth century and even further short of China's net saving position The capital stock is considerably newer and needs less to be replaced.
These savings disparities point to a key difference in the investment fundamentals of the growth potential of the two economies. Chinese investment accounted for 44% of GDP in 2018, more than double the US market share (21%). And, given the aging US capital stock, the disparity between net investment positions building the capacity of both economies is even greater.
This underlines China's comparative advantage in financing its long-term growth imperatives, such as urbanization, infrastructure investment, human capital, research and development, and the transition to local innovation.
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A GREAT GAP IN THE COMING YEARS
In addition, the gap between the US and Chinese economies is likely to widen further over the next few years, as the seemingly chronic US budget deficits further reduce domestic savings.
An additional complication is that, in financing its limited investment potential, the United States will have to face equally chronic deficits in the current account to increase its declining domestic savings.
And, of course, the current account deficit accompanies an oversized multilateral trade deficit, highlighting the weak link in the pending trade agreement: relying on a bilateral Chinese solution to solve a much more insidious deficit problem with more than 100 trading partners.
In the end, the economic strength is relative. The current strength of the US economy seems fleeting. Its short-term resilience is already weak and, given long-term worrying fundamentals, could weaken further.
China is in the opposite position: today's short-term weakness should be corrected by the middle of the year, in a context of relatively strong long-term fundamentals. This reality will be a rude awakening for American negotiators, who misinterpret the strength of China and the hollow benefits of a cosmetic trade agreement.
Stephen Roach, a faculty member of Yale University and former president of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.
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