Business / Economy

Trade war may put damper on China's goal of 'high-quality' growth

by Tomoyuki Tachikawa

Kyodo

China’s latest gross domestic product data underscore that it will struggle to achieve its goal of “high-quality” economic development against the backdrop of an intensifying trade war with the United States.

As the trade dispute between the world’s two largest economies shows no signs of ending, China’s leadership is expected to be forced to give up structural reforms aimed at minimizing financial stability risks — a factor that would temporarily weigh on economic growth.

Some analysts have also warned that China may face “stagflation,” where economic stagnation is coupled with higher inflation. That could hurt the global economy, which has been buoyed by robust growth of China’s domestic demand.

The world’s second-biggest economy expanded 6.5 percent from the previous year in the July-September period, official data showed Friday, with the National Bureau of Statistics emphasizing that it “continued to stay stable with good growing momentum.”

But the pace of economic growth was slowest since the January-March period in 2009, when the world economy suffered from the aftermath of the 2008 global financial crisis triggered by the collapse of U.S. securities firm Lehman Brothers.

Since earlier this year, the governments of U.S. President Donald Trump and Chinese leader Xi Jinping have been engaged in a tit-for-tat rounds of punitive tariffs on hundreds of billions dollars of each other’s imports.

China and the United States have failed to resolve the trade row through dialogue. Rather, tensions between them have been escalating, as Washington has been serious about containing Beijing’s economic and political influence in the global arena.

At a news conference in New York in late September, Trump said China wants him and his Republican Party to “lose an election,” as he has been accelerating pressure on Xi’s leadership to curb the huge U.S. trade deficit with China.

Beijing and Washington have been also divided over Taiwan, North Korea and the South China Sea, home to some of the world’s busiest shipping lanes, where China and several Southeast Asian nations have overlapping maritime claims.

As for Xi, Trump said, “He may not be a friend of mine anymore,” indicating that he is reviewing their relationship. Trump had described Xi as a “great” leader since taking office in January last year.

After he became China’s president in 2013, Xi moved ahead with structural reforms for the past five years to normalize the financial system, with corporate debt expanding and a bursting of asset-inflated bubbles looming.

Xi put more emphasis on “high-quality” economic development than on “high-speed” growth, declaring a “critical battle” against financial risks, poverty and pollution.

A stabilization of the financial system and a good relationship with the United States are key to attaining the goal, but under the current circumstances, Xi would have to set aside structural reforms for the future, many economists in Beijing believe.

Earlier this month, China’s central bank decided to cut the amount of cash that large banks must hold as reserves, to prompt financial institutions to lend more money to companies and other entities to bolster consumption and domestic investment.

Accommodative financial market conditions would help balloon investment in fixed assets further, which could rekindle fears of a bubble burst.

Washington has already imposed double-digit tariffs on around half of the products it imports from China each year, and China has so far levied tariffs on more than 80 percent of all goods imported from the United States.

Although Friday’s data showed the total value of exports increased 6.5 percent during the first nine months this year, higher tariffs by the United States have started to dampen orders for Chinese export-oriented manufacturers, an industry source said.

In addition, the pessimistic outlook for China’s economy has prodded financial market investors to decrease their holdings of the country’s currency, driving up consumer prices. The yuan dropped to its lowest level in nearly two years on Thursday.

While the depreciation of the yuan usually boosts exports by making Chinese firms’ products cheaper in other countries and pushing up the value of overseas revenue in yuan terms, it jacks up import prices and causes inflation at home.

China’s consumer price index rose 2.5 percent from the previous year in September, up from a 2.3 percent climb in August, marking the sharpest gain in February.

“China is likely to encounter economic slowdown and inflation simultaneously,” one diplomat stationed in Beijing from an Asian nation said. “The possibility cannot be ruled out that stagnation will occur in China, having a negative impact on global economic recovery.”

China, which has an abundant labor force and substantial resources in raw materials, has established its status as the “world’s factory” by inviting enterprises from abroad and obtained foreign currency by increasing its exports to the United States.

Sluggishness in China’s economy would drag down the economies of neighboring and emerging countries — including Japan — that have supplied components to Chinese companies, the diplomat in charge of economic policy said.