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ECONOMY: Pressures Are Increasing
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Pressures Are Increasing
By Morgan Brady

BT 201910 ECONOMY 02The markets have witnessed a relief recently with positive news regarding the trade war between the US and China.
 

President Trump delayed tariffs on some Chinese goods by two weeks. This meant that Chinese officials could celebrate their national day on the 1st of October without a fresh escalation. China welcomed the move and reciprocated it by adding around 16 agricultural goods from the US, including soybeans and pork to the list of exempted goods. Those goods would not have additional tariffs imposed on them until September, 2020. The agricultural goods are an issue of crucial importance to the US administration as the votes from the farmers are important for the re-election of president Trump for a new term.
 

Markets were exuberant on the news and equities soared. Those somewhat conciliatory actions came shortly before the planned talks would take place in next month (October). Mid-level teams from the two countries are scheduled to meet soon, before high-level talks afterwards. In its approach, China wants to separate non-trade issues, such as geopolitical threats and national security from trade talks. China prefers those issues to be discussed by another team.
 

While those developments are positive, the trade war is still far from over. The trade war is having a negative effect on both economies. Around 65 of Chief Financial officers of US companies said that they expect the US trade policy to have negative implications for their businesses in the next two quarters. None of them said that they expected a positive effect.
 

Exports are suffering

BT 201910 ECONOMY 03The trade war has taken its toll on the Chinese economy, as well. Although the numbers fluctuate, the effects can still be seen. The exports from China to the US fell surprisingly in August by 16% on a year-on-year basis. Imports from the US to China, on the other hand, declined by 22.4%.
 

Factory activity

A worker is seen on the shop floor of an engine maker in Weifang in East Chinas Shandong provinceDomestically in China, The Caixin/Markit factory Purchasing Managers’ Index (PMI) printed a reading of 50.4 in August, which is higher than the 49.8 reading expected by analysts polled by Reuters. The Caixin/Markit manufacturing PMI was 49.9 in July. The August reading shows that the sector is back to growth from contraction, as it came above the growth/contraction 50 points benchmark.
 

The new orders sub-index showed a lower reading in August than in July. However, it remained in growth territory. The new export orders remained in contraction territory and reached a record low this year in August, reflecting the impact of the US-China trade war.
 

Analysts say the improvement in the main index in August was a result of increased production activity, but it does not reflect long-term concerns. The picture is not very rosy.
 

Consumer prices

BT 201910 ECONOMY 06According to data from the Statistics Bureau of China, consumer prices increased by 2.8% in August on a year-on-year basis, the same increase that took place in July, and higher than the increase that took place in the previous months in 2019. On a month-on-month basis, consumer prices increased by 0.7% in August, higher than the increase of 0.4% achieved in July.
 

The year-on-year increase was 2.8% in urban areas and 3.1% in rural ones. The food prices increased by 10%, and the non-food prices grew by 1.1%. The prices of consumer goods increased by 3.6% and the prices of services went up by 1.6%. From January to August, on average, the overall consumer prices were up by 2.4% from the same period of the previous year.
 

The consumer price data show that domestic demand is still healthy, especially when considering rural areas and looking at food prices. Consumer prices for education and culture grew by 2.1% on a year-on-year basis in August, those for health care grew by 2.3%, those for clothing grew by 1.6%, those for residence grew by 1 percentage point, those for household articles and activities grew by 0.7%, and those for transportation and communication shrank by -2.3%. Other articles and activities grew by 4.7%.
 

Producer prices for the industrial sector

BT 201910 ECONOMY 05The producer price index released by the Statistics Bureau of China showed a decline of -0.8% on a year-on-year basis in August. This index has been declining for four months. On a month-on-month basis, the index showed a decline of -0.1% from July.
 

Conclusion

BT 201910 ECONOMY 01External pressures are mounting against the Chinese economy. Those are mainly represented by the trade war and global growth slowdown. Future growth in the Chinese economy will depend on how much the economy can move from being exports-driven to self-reliant. Reducing the reliance on exports can take some time, however.
 

The government is trying to stem the decline. Recently, the Central Bank of China reduced reserve requirements for the seventh time since early last year to increase credit in the economy, and boost investments. Yet, many analysts believe that the government needs to do more to offset the impact of the trade war. Perhaps more focus on Asian and African markets can help in maintaining growth. Furthermore, breakthroughs in talks next month - should those breakthroughs happen- will likely bring back optimism.

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