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As each day passes, it seems more likely that the United States and China will not be able to avoid a large-scale trade war.
On the US side, President Donald Trump recently announced his willingness to apply tariffs on all Chinese exports to the United States by January. At the same time, in Beijing, the South China Morning Post reports that the think tanks are struggling to honestly discuss with legislators how to proceed with trade negotiations, fearing that critics of the Chinese economic model or the treatment of trade negotiations by the government has not reached them so far. in trouble.
In the present state of affairs, frank communication seems to be the subject of a general shortage. One day, Chinese presidents Xi Jinping and Trump seem to have sidelined themselves; the next, the market slips again.
This year was already becoming a difficult year for Chinese economic decision-makers. After a stable start in 2018, the country's economy began to slow significantly in the second half – long-awaited result of the Chinese financial system reform, an attempt to disassociate itself from the debt chasm that allowed its economy to grow Great financial crisis.
Analysts were expecting this type of hiccups. Beijing has been preparing the world for years for a more volatile and slower growing Chinese economy, and on the whole, they have convinced the world to be able to cope with it.
However, they did not expect that the added pressure of a trade war – the drama of continued failure of negotiations – would exacerbate the situation.
"For China, the signs of a further decline in growth and the threat of rising US tariffs are an unfortunate combination," said Bloomberg chief economist Tom Orlik. "To date, Beijing has managed to find policies that combine targeted stimulus with reform measures, and if demand continues to deteriorate, it will become harder to put on the needle."
Today, the Chinese currency, the yuan, is down against the dollar for 10 years and Beijing pledges to fight to keep it afloat. The Chinese real estate market, the engine of its economy, is losing momentum as housing sales fell by 3.6% in September, and that real estate investment – half of total investment in country – should follow. The stock market collapses – the Shanghai Composite index has lost 21% since the beginning of the year – and warning signs in sectors such as auto and manufacturing are blinking .
This is a test for the brains of the Chinese economy. Since the late 1990s and early 2000s, it has never been so weak in the face of a possible disaster. The way decision-makers manage this could change the way the entire global financial community thinks about its ability to cope with the crisis.
This could turn into a crisis of faith and challenge the most important idea that holds the cohesion of the Chinese economy – I call this the theory of "they have this" of the & # 39; 39, Chinese economy.
Chill, they have that
The theory of the Chinese economy according to which they have this theory is: if democratic capitalism is a good thing, authoritarian state planning has its advantages – and one of those benefits is that the people the smarter having all the answers run the Chinese economy. They can guide it as they please and, up to now, they have put in place the right mix of policies to avoid all the small catastrophes emanating from the economy since the situation started to get really difficult in 2015.
So, in case something important happens, do not worry, they have that.
You hear this thesis in academic circles and at conferences on hedge funds and thinkers of some think tanks. Even the well-known investor Ray Dalio – founder of the world's largest hedge fund, Bridgewater Associates – is a supporter of this notion. During his stay in China last February, he preferred to avoid direct questions about the economy, according to the Wall Street Journal, claiming only that he was "very optimistic" with regard to the China and that the problem was not the challenges, but the way they were treated. .
And Beijing has the best handlers in the industry, they say.
On the other hand – and this article deals a lot with the other side – and if it is not the case? This thought of the type "they have this", after all, was the reason why the USSR was such an economic success until it really was not. So maybe the case for China.
Now that an extremely disruptive trade war has been incorporated into an already complicated reform program, the prospect that Chinese policymakers are losing the benefit of the doubt "they have it" is well and truly at the rendezvous.
At the Center for Strategic and International Studies, authors Logan Wright and Daniel Rosen examined the slow creation (and potential destruction) of China "they have this" story in an article titled "Credit and Credibility, Risks to the Resilience of China".
They explain it like this:
"Traditional explanations of China's financial stability underestimate the vital importance of Beijing's credibility in providing the government with a sufficient response to any financial crisis." Credibility is a powerful political asset that strengthens financial stability. it is not intrinsic to the Chinese system.
Credibility is a byproduct of a history of successful and meaningful interventions defending the interests of investors. This credibility will be put to the test when China reforms its financial system and move away from implicit and explicit generalized guarantees on assets, companies and banks …
Credibility has helped Beijing manage the typical consequences of rapid credit expansions, but this credibility is ephemeral and will be taxed in the near future as the financial reform proceeds. "
Stop, you do too much
Now enter the trade war.
Current and unexpected circumstances are driving policymakers back to what has put them in this situation and undermining their credibility – easing credit conditions.
On one side, the Chinese media reassure investors that the economy is still on the path to reform and that they will stick to their weapons despite a situation that looks like a terrible situation.
On the other hand, there are signs that politics could go in the opposite direction. In a note to customers earlier this month, analysts at Societe Generale acknowledged that the country had seen a sharp increase in local government bonds in August and September. Earlier this week, the People's Bank of China issued more guidelines on stimulating investment in infrastructure. At about the same time, the China Banking and Insurance Regulatory Commission asked banks to strengthen their unsecured or unsecured loan loans to private companies.
Now, to be fair, private companies in China are not as indebted in debt as its huge state-owned enterprises. And policymakers say the stimulus efforts they have made so far (such as a recent tax cut) are targeting private companies and households. As a result, they do not return to old habits and will not fortify "zombie" businesses – nonprofit, state-owned businesses that need credit to survive.
China adopts a global vision of the national interest for China and is committed to bringing together all the resources of its economy in the face of this debt crisis. For example, the government has urged private companies in good health to take stakes in public companies in difficulty in the past.
Be that as it may, recent data from private geometer China Beige Book contradicts the government's argument that only private companies obtain credit support.
"Corporate borrowing is not slipping – it exploded in the third quarter to the highest level since 2013," the company said in its latest quarterly report.
"We could have expected an increase in borrowing by small and medium-sized companies, the PBOC seemingly insisting as much every week, but during the quarter, everyone borrowed more. borrowing soaring By sector, manufacturers have borrowed at a fast pace, while real estate companies have borrowed at a record level of 5 years. "
This is perhaps why, in a recent note, analysts at Societe Generale reported a "surprising strength in manufacturing investment", while manufacturing output slowed by 6.7% second quarter at 6.0% in the third quarter and continued to decline. It also seemed odd to them that real estate investment is still holding up despite falling property values.
"They said that the deleveraging was irreversible, but they have already reversed it," said Leland Miller, founder of China Beige Book, on the phone at Business Insider.
"They have found their old formula … it is not 2009 or 2010, but it is remarkable to hear the story – that is to say that the conditions are difficult and that the companies can not get credit.They invest much more than official data is more negative than what we saw in China Beige Book Q3. "
A slowdown with Chinese characteristics
Clearly, the measures taken by the government have not been enough to counter China's economic slump, suggesting that the introduction of new credits into the economy is becoming less and less effective as Debt accumulates.
But what remains to be done? Many things could go wrong before the United States and China reach any agreement at the meeting of Xi and Trump at the G20 at the end of the month.
For example, China's export figures for September seemed good, in part because exporters were about to place orders in the United States before a new trade war. This means that we have not even seen the full impact of Trump's trade war measure in the data yet.
Meanwhile, we are witnessing personal consumption – what the Chinese authorities have tried so hard to do to modernize the economy – is already suffering.
From Societe Generale:
"Third quarter data suggests that domestic demand – primarily consumer demand – has been less supportive of growth in the quarter, more than offsetting the improvement in net trade.
Since the beginning of the year, the contribution of consumption (including households and general government) to overall GDP growth has risen from 5.34 to 5.23ppp, while the contribution of net increased from -0.67pp to -0.66ppp. "
This data is particularly disconcerting for China this week. On Monday, Xi launched a six-day exhibition in Shanghai designed to introduce the country as a buyer of international products. Unfortunately, according to the New York Times, participation in the event was low. The big trading countries like Germany, Japan and the United States did not show up. Kenya's president, one of the participants, complained that his country's trade relations with Beijing were "heavily skewed in favor of China".
Today more than ever, China needs friends, more precisely friends who still believe "that they have that".
