In the contest between China and the US over which country can better withstand the fallout from their trade war, Beijing is looking to its consumers to keep the nation’s economy afloat.
Figures released this week showed China’s gross domestic product fell to 6.2 per cent in the second quarter of this year, the lowest rate since 1992 when the country adopted its current method for calculating GDP.
The data would have been worse were it not for buoyant domestic consumption. But economists are increasingly worried about how long strong growth in domestic demand can last.
“The direct impact of trade tensions is a slowdown in export orders but the indirect impact is probably more important, and that’s the impact on corporate confidence,” said Robin Xing, chief China economist at Morgan Stanley. “Firms might delay capital expenditure. The job market will face pressure and [that] will affect consumer spending.”
The trade dispute, in which both sides have raised tariffs on billions of dollars of imports, has already hurt businesses in the world’s two largest economies. In the US, importers that rely on cheap Chinese materials and goods have faced price rises of up to 25 per cent on everything from aeroplane parts to frozen pollack.
On the other side of the Pacific, Chinese manufacturers have suffered a fall in export orders, which declined 1.3 per cent in June compared with a year earlier, a clear sign that tariffs have started to bite.
The question for the second half of the year is which country can hold out the longest as the dispute drags on.
In the US, employment numbers have remained strong, with the economy adding more jobs in June than it has in any month this year. US president Donald Trump has bragged on Twitter that companies are fleeing China to avoid tariffs. He has even taunted his counterpart Chinese president Xi Jinping that the US is in “no hurry” to strike a deal.
China, meanwhile, reported robust domestic consumption in June, with retail sales up 9.8 per cent, beating most analysts’ expectations and marking a sharp increase from the 8.6 per cent recorded in May. Service sector growth also remained stable in the first half of the year, growing 7 per cent on the same period last year, according to data released on Tuesday.
But the strong headline figures disguised underlying areas of weakness in the numbers, economists said. Retail sales, for example, were led by auto sales, which received a major boost from rebates during the month. Most other aspects of retail consumption in the country, including real estate, have been sluggish.
‘Whether [auto sales] is a one-off or front-loading, we’ll have to wait until next month to see if it holds up,” said JPMorgan Asset Management’s global market strategist Marcella Chow.
Service sector growth was also less promising than the headline figure suggested. Growth from financial services was a key driver in the second quarter of the year, Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore, said.
That meant activity in China’s securities houses, not areas such as demand for housing, were underpinning that growth.
“That’s the support for the moment but not necessarily something I would count on if I was the Chinese government,” he said, noting that a disruption to China’s strong equity market performance so far this year could quickly stamp out the spoils from financial services activity. The CSI 300 index of major stocks listed in Shanghai and Shenzhen is up about 28 per cent this year.
Consumer income was closely linked to industrial production in China due to the number of people employed in manufacturing, said Yue Yuan, an economist at China International Capital Corporation in Beijing.
Until now, industrial output has proven resilient, growing 6.3 per cent in June from the same month a year earlier.
“We’ve seen some impact from the trade dispute on industrial production but it has not had a huge impact on employment,” Mr Yue said.
But Mr Evans-Pritchard warned that any impact from the trade war on export-oriented manufacturing would eventually hit factory jobs and the spending ability of average Chinese people. “There are lots of feedback loops” connecting trade with employment and domestic consumption in China, he said.
To counter these effects, the government has directly intervened in the economy with stimulus measures, such as a record wave of infrastructure project spending at the start of this year. That has continued with an increase in special government bond issuance. Total social finance, a broad measure of credit growth in China, picked up in June — a sign that leaders in Beijing will resort to more debt-fuelled growth through to the end of 2019.
Mr Yue noted that other domestic policies, such as a large value added tax cut, were set to play out in the second half of the year. The effectiveness of those policies is yet to be proven. “We have to wait and see.”