China’s Strengthening Economy Bolsters Its Hand in Trump Trade Talks

Source: By Yinan Zhao, Bloomberg • Posted: Wednesday, April 17, 2019

China’s economy rebounded through the first quarter, offering the government room for maneuver as trade negotiations with the U.S. enter a crucial stage.

Gross domestic product rose 6.4 percent in the first three months from a year earlier — matching last quarter’s pace and beating economists’ estimates. Factory output in March jumped 8.5 percent from a year earlier, much higher than forecast. Retail sales expanded 8.7 percent while investment was up 6.3 percent in the year to date.

Industrial output and retail sales recover in 2019

The numbers are a reversal from as recently as January when key readings were pointing to a pronounced downturn. U.S. officials had previously touted such weakness as leverage in their push for a trade agreement.

“President Trump and other U.S. officials spent much of the last year saying that China’s slowdown was making Beijing desperate for a deal,” said Michael Hirson, Practice Head, China and Northeast Asia at Eurasia Group and a former U.S. Treasury Department official. “Now that China’s growth is recovering, Trump and team will be getting more questions from pundits and the media about whether his leverage is slipping away.”

Late-stage Negotiations

While the better data isn’t likely to radically alter the course of negotiations that are already in their late stages, at the very least they will change the atmosphere, Hirson said.

White House economic adviser Larry Kudlow, who in January described China’s economy as “very weak,” on Tuesday said the negotiations are making “very good progress.”

Trump Stirs Alarm That He May Be Giving China a New Trade Weapon

The exchange of tit for tat tariffs last year between the world’s two-biggest economies on roughly $360 billion worth of each others goods had dragged on global growth and hammered sentiment before both governments agreed a truce.

The robust data stoked skepticism as critics said authorities are again relying on cheap credit to stoke lending and demand. Investment by state-owned firms quickened to 6.7 percent and slowed for private firms to 6.4 percent, underscoring the government’s role in supporting growth.

“I think policymakers, who were choosing “deleveraging” over the past two years, are now back to increasing leverage,” said Alex Wolf, head of investment strategy at J.P. Morgan Private Bank in Asia.

Not All Good News

It wasn’t all good news either: The surveyed jobless rate remained over 5 percent for a third month and the nominal growth rate, which is un-adjusted for price trends, decelerated. That means slower corporate profits. On top of those, some other factors raising concerns about the sustainability of the recovery are:

  • A sharp slowdown in fixed-asset investment by manufacturers
  • The slowest services sector growth since 1992
  • The pickup in state investment, probably on the back of efforts to spend more of the budget earlier in the year. As the budget funds run down through the rest of the year, that investment may taper
  • Polluting sectors such as rubber, plastics and mining saw big increases in output, suggesting relaxed pollution controls

The reports led some economists to conclude that the data mean policy makers will scale back stimulus measures that had been penciled in for the year. The central bank may be already starting to do that, withdrawing some of the long-term funding it supplies banks on Wednesday.

PBOC Trims Liquidity Supply in Sign It’s Dialing Back Stimulus

“First quarter and March data confirm a cyclical turning point,” Morgan Stanley economists including Robin Xing in Hong Kong wrote in a note. Reserve-ratio cuts “could be fewer amid strong fiscal support. We expect an economic upturn in the second to fourth quarters as fiscal easing fully kicks in, trade tensions ease, and consumer confidence normalizes.”

For the global economy and for China’s trade negotiators, that’s a marked turnaround from the gloomy outlook seen just a few months ago.

“It strengthens China’s hand,” said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. “With the strong data, it’s easier to make a win-win argument that China will help the global economy to achieve a soft landing, and everyone is better off without the uncertainties as global growth slows.”

— With assistance by Kevin Hamlin, and Xiaoqing Pi