How Will China’s Soft-Landing-Policy Suffer Under Trump?
When it became clear Trump was about to win the US presidential elections, the value of the Mexican Peso nosedived and lost in excess of 10% overnight. That wasn’t surprising, as Trump had made several anti-Mexico statements in its bid to become the next president of the USA, and the economic repercussions and impact from a ‘cold trade war’ between Mexico and the USA would have been huge.
But Mexico wasn’t the only country president-elect Trump has made comments about, as he was also particularly harsh on China. However, since he has effectively been elected to take office, Trump has been backtracking on some of his previous statements, which confirms the Dutch expression ‘the soup is never eaten as hot as it’s served’. It will be interesting to see how President Trump will engage in a long-term relationship with the Chinese, and it might not be as confrontational as one was previously expecting.
A more difficult and constraining relationship with the USA could be tough for China, as its central government is still trying to position its economy for a soft landing. The growth rate has been decreasing for several years now, and the main task is now to make sure the deceleration of this growth rate doesn’t cause any severe difficulties.
This won’t be easy, as the country still has a severe overcapacity in the glass and steel sectors, despite the fact the government has unveiled plans to reduce the steel output by 10-15%. Despite these aggressive plans, China is hopelessly behind with regards to the output reduction. A large part of the responsibility for this lies with the government, as the state-owned enterprises are still massively inefficient. According to Danske Bank, the SOE’s had a total share of 39% of the country’s industrial assets, but employ just 18%.
The focus seems to have shifted from a market-based intervention (using the state-owned enterprises to steer the economy) to a fiscal policy-based attempt to let the economy make a soft landing. However, this could also backfire, as the current plan mainly consists of a substantial monetary expansion, and an increased access to credit, and the 2008 global financial crisis has taught us that’s perhaps not always the best way to create growth as this growth rate might be out of touch with how the ‘real’ economy is trending.
Indeed, let’s have a look at a chart which shows the growth rate in the private consumption:
Source: Danske Bank
It’s very clear the consumption growth rate is slowing down. Perhaps this isn’t a surprise, but it’s practically the start of a vicious circle of lower growth. The consumption expenditures are slowing down, causing the economy to contract (as a lower demand for products reduces the supply-side as well), and the GDP to grow at a continuously slower rate.
Source: Danske Bank
And yes, China is willing to do a lot to protect its economy. Surprisingly, the forex reserves have hit a 5 year low, and have fallen by approximately 25% since the peak of 2014.
Source: ABN AMRO
But at the same time China has been reducing its forex reserves, its gold purchasing pace remains remarkably consistent. The country added 170,000 ounces in July, 160,000 ounces in August and again 160,000 ounces in September. That’s remarkable (and suspiciously) consistent, and it will be interesting to see if the country is buying more gold now it’s on sale again.
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