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Trade War Update: More China Stimulus, Fewer China Shoppers

China is stimulating more and buying less. Yes, you can probably blame President Trump for this one.

China’s fiscal expenditures increased 8.8% during the January to August time period versus the same period in 2018. Fiscal spending combined with tax cuts, regulatory rollbacks and targeted monetary easing are geared to offsetting the effect of the trade war. The stimulus is targeting private companies that have historically had trouble accessing credit. It is unclear if that stimulus is a state subsidy, something Washington continues to complain to Beijing about.

Exports to China are shrinking. China shoppers aren’t shopping. And in this case, the shoppers that matter most to countries like Brazil are Chinese corporates. They are buying less. Brazil’s exports are negative over the last three months, thanks in large part to China’s lackluster demand.

According to BNP Paribas, exports from emerging markets fell overall in August by 2.3%. That’s without China. With China, it’s worse.

“China has been the main driver of emerging market exports,” BNP Paribas economists Luiz Peixoto and Marcelo Carvalho, head of emerging markets research wrote in a note to clients today. “Our economic team is forecasting contraction in Chinese imports well into 2020. Lingering trade policy uncertainty means we do not see the downtrend reverting in the near term,” he says, adding that some net oil exporters should be okay.

Chile and South Africa have been the hardest hit from slowing Chinese demand so far this year. India and Turkey are still positive, but less so than the year before. Oil exporters and one-trick ponies like Argentina (soy oil and soy meal) are still okay with China trade. But the list is shrinking.

Investment banks like BNP, Nomura and Barclays were out in front in calling for Chinese GDP to miss its 6% growth target earlier this year, possibly closing in on 5% GDP growth in 2020.

China’s Premier Li Keqiang said this week that it would be “very difficult” for them to hit their growth target in 2019.

See: China’s Economy Will Shrink. Trade War Has No End In Sight – Forbes

“I’ll give the Chinese economy credit. Like (boxer) Joe Frazier, it’s one tough sucker. Each time it gets knocked down it gets up again—a little wobblier in the knees, vision increasingly blurred—but in an impressive, if not ultimately futile, display of fortitude,” says Brian McCarthy, chief strategist for Macrolens, a Stanford, Connecticut-based investment research firm.

Chinese policy makers face a dilemma. President Xi Jinping has been an advocate for sustainable growth. He has been a critic of shadow lending facilities in the provinces and dubious debt.

Another aggressive credit stimulus would entail a degree of economic instability unacceptable to Xi. He might prefer a slower economy less vulnerable to external shocks than one dependent on dollar inflows to pay the bills.

Shadow banking is still small enough to be absorbed onto state bank balance sheets if those loans went bust. The People’s Bank of China has enough financial firepower sitting in reserves to protect the nation’s banking system.

For now, China’s government is forcing its policy banks, like the Bank of Construction, for example, to lend to small and midsized businesses, regardless of creditworthiness or the ability of their project finance to have an investment return.

China bears are betting against the central bank. That’s often been a losing bet.

Branden Ahern, CIO of KraneShares, a China-ETF company in New York, says he is still an optimist despite China’s declining growth rates.

He said that Thursday’s low-level meetings between trade negotiators from both countries will lead to senior meetings in October with the much-hoped for Xi-Trump meeting at the APEC conference in Chile in November.

“There were also reports that China is buying U.S. oil again,” he says. “It’s another positive step in thawing relations.”

If one thing can be said about Trump’s first two years in the White House, China relations freeze faster than they thaw.

On the political front, China is hoping for an end to the Trump Administration in 2020. They are able to turn the trade war into a game of Survivor, hoping to outwit, outlast and outplay their toughest opponent yet.

On the economic front, if the U.S. economy slows, Trump may be less inclined to increase tariffs on China-made consumer goods in December. Should he do that, China won’t see it as Trump giving in to the National Retail Federation but will see it as a sign that they can outlast Trump over the next 12 months by keeping the pressure on the U.S. economy.

A weaker U.S. economy also gives China the opportunity to engage in offensive action to make it even weaker—short-term big-bang credit stimulus, debt write-downs for companies poorly managed and oversupplying the market with things no one is buying, and controllable depreciation in the yuan that renders tariffs moot.

A weaker U.S. economy doesn’t help bring China’s GDP back over 6%. Nor does it help with declining exports out of emerging markets into China. If China’s biggest customer is in decline, China will need to stimulate its economy, possibly in ways Xi wishes to avoid.

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