White House's Kudlow says China looks 'terrible.' Data show otherwise

China‘s economy is far from “collapsing” or looking “terrible,” contrary to White House economic advisor Larry Kudlow‘s characterization of the Asian country.

“I’m not a China expert, although I’m boning up as fast as I can, I would just say right now their economy looks terrible,” Kudlow said Thursday in response to U.S. President Donald Trump‘s question at a cabinet meeting about China’s prospects.

Kudlow also said the latest data showed that “retail sales, business investment is collapsing.” “There may be some manipulation” in the currency and “investors are moving out of China because they don’t like the economy,” he added.

Growth is slowing and the latest economic reports did disappoint analyst expectations. Worries about high debt levels persist. The Chinese yuan has fallen to its lowest in more than a year against the U.S. dollar. However, China’s situation is not as dire as Kudlow’s comments suggest.

First, fixed asset investment did slow to 5.5 percent year-on-year growth in July, the lowest since 1999, according to Shanghai-based data company Wind Info. Retail sales growth of 8.8 percent in July from a year earlier missed expectations of 9.1 percent and fell from 9 percent in June, according to Reuters. But that is still better than the 6.4 percent year-on-year increase in U.S. retail sales reported for July.

Beijing is trying to transition China’s economy to a consumption-driven one from one reliant on manufacturing. The economic growth rate is bound to decline in this process, since the labor productivity of the services industry is significantly lower than that of the manufacturing industry, according to Lu Zhang, a Beijing-based economist at investment research firm CEBM. The quality of China’s growth is also improving, she noted.

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Overall, China’s gross domestic product (GDP) is expected to grow 6.6 percent this year, slower than last year’s 6.9 percent rate but still one of the fastest-growing economies in the world and far above the 3.9 percent global growth forecast, according to a July report from the International Monetary Fund. That compares with for the IMF’s outlook for a 2.9 percent increase in U.S. GDP this year, up from 2.3 percent last year.

Second, the Chinese yuan has fallen more than 5.5 percent in 2018 against the U.S. dollar, but is down less than 1 percent versus the euro over that time period.

Part of the weakness in the yuan is due to a slowing economy and easing domestic monetary policy. But at the same time, the U.S. dollar index has strengthened to its highest in more than a year amid Federal Reserve tightening.

The official China Foreign Exchange Trade System RMB index, which tracks the yuan’s moves against a weighted basket of currencies such as the euro, Japanese yen and Swiss franc, is down about 2 percent so far this year, according to Wind.

Third, data show foreign investment in China is on the rise, but down in the U.S. That contrasts with Kudlow’s comment to Trump that investors are moving out of China and “coming to the USA because they like our economy.”

New foreign direct investment in the U.S. fell 32 percent in 2017 to $259.6 billion, according to the latest preliminary figures from the U.S. Bureau of Economic Analysis. Chinese acquisitions and investments in the U.S. also dropped 92 percent to $1.8 billion in the first five months of this year, research and consulting firm Rhodium Group said.

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Actually-utilized foreign capital in China is lower overall at $76.1 billion year-to-date, but up single digits year-on-year, according to analysis of Ministry of Commerce data using Wind Info.

In another indication that capital is not fleeing the country, Chinese foreign exchange reserves rose $5.82 billion in July to $3.118 trillion, contrary to expectations for a decline of $12.1 billion, according to Reuters.

China does, however, face pressure as authorities try to reduce reliance on debt-driven growth, while the economy could also be affected if trade tensions with the U.S. escalate. Kudlow’s remarks come as the U.S. and China agreed to resume negotiations on trade later this month.

— CNBC’s Everett Rosenfeld contributed to this report


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