Chin Up, China

China's economic growth slowed

Image source: Rapin_1981, Popartic, photocosmos1, Alejandro_Munoz - Shutterstock

What's going on?

China’s economy grew 6.2% in the second quarter of 2019 versus a year before: its slowest rate since the end of the Cold War (tweet this).

What does this mean?

While the growth rate was in line with economists’ expectations – and with China’s target of 6-6.5% for 2019 as a whole – a close inspection of the data shows a Chinese government working hard to boost the country’s economy and offset the impact of a damaging trade war with the US. Tax cuts and increased bank lending designed to boost spending in China contributed to strong factory output and retail sales. But while the domestic picture was relatively (if artificially) rosy, Chinese exports contracted in June, dragging down growth overall.

Why should I care?

For markets: More government help may be on the way – but it could prove smothering.

China’s strategy of offsetting export weakness with economic “stimulus” seems to be working – for now. And if a trade deal with the US continues to prove elusive, many investors expect more of the same. Increasing government spending on infrastructure while lowering taxes and (for the first time since 2015) interest rates should lead to greater Chinese demand, which could benefit international companies that sell into China. But with the country’s debt level already high, there may be a limit to how much more stimulus the Chinese economy can take.

The bigger picture: Manufacturers are leaving China.

From GoPro cameras to Nike shoes, US manufacturers are increasingly moving production of items subject to American tariffs away from China to neighboring low-cost countries like Vietnam. Indeed, Vietnam’s increasing popularity among US manufacturers means it too may soon feel the wrath of American trade taxes. If US companies run out of places to go, they might bring more production back Stateside. But the higher costs involved would likely mean correspondingly higher prices for their goods…

Originally posted as part of the Finimize daily email.

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