About that hard landing some China haters have been forecasting now since around 2009: If President Trump’s trade war can’t stop China, what will?
The International Monetary Fund raised its China GDP target to 6.3% for 2019 from their January estimate of 6.2%. It’s not a huge bump, but it’s going in the right direction.
China’s debt load is often cited as the reason to be bearish. Most estimates have nonperforming loans quite low and on par with averages seen within the member states of the Organization for Economic Cooperation & Development. There are other problems besides credit that befuddle China investors and, to some degree, Chinese policymakers—things like oversupply and dependence on real estate and land sales for economic growth at the provincial level.
But overall, China’s transformation continues. This Frankenstein economy that is one-half communist, one-half capitalist, is a short seller’s nightmare. Not even Trump’s trade officials running roughshod over them has been enough to force a hard landing of the Chinese economy. Which, by the way, might be a terrible idea for countries throughout Asia and even in faraway places like Brazil that have come to count on China as a key part of its export market.
Last week, China’s official Manufacturing Purchasing Managers Index (PMI) surged 1.3 points to 50.5 for March, beating market estimates of just under 50. The Caixin PMI, which is often more trusted by the market because it covers more small and medium-sized enterprises, rose to 50.8 from 49.9. Finally, China’s services PMI is also over 50 and not looking back.
’In the last year or so, China’s economy has faced twin headwinds from U.S. trade aggression and domestic reforms, but the government’s stabilization measures now appear to be bearing fruit, reducing the odds of a hard landing,” says Jan Dehn, head of research for the Ashmore Group, an emerging-market bond fund manager with a little over $70 billion invested in emerging markets.
China’s current account surplus rose by 0.8% of GDP in the fourth quarter of 2018 to 1.5% of GDP, or $54.6 billion , driven by—guess what —a trade surplus, which was 38% higher on the quarter thanks to a record-breaking U.S. trade deficit.
China’s exports are expected to have rebounded in March after a sharp drop in February, while imports likely shrank for a fourth straight month, a Reuters poll from Wednesday showed.
Meanwhile, Trump’s trade war is in limbo. Dialogue between the two sides continues even as officials and sources tell media that negotiations are in the “final stages.” Trump said on Saturday that a deal could materialize in as little as four weeks, though the deal looks already like a paper tiger to China hawks who see Trump giving Xi Jinping too much time to adhere to promises while Trump’s time in the White House is limited.
Last Friday, Larry Kudlow announced that Beijing had finally conceded that U.S. officials “have a point” on intellectual property theft, noting previously that “they were in denial.” But whether China is ready to commit to reform, such as hardening its stance against IP theft, ending mandatory transfers of technology and removing non-tariff barriers to U.S. goods, is tough to tell. Plus, China has probably moved as far as it will go on IP protection, having just opened up its court for intellectual property rights in December.
China’s sense of sovereignty and its ambition to be a modern, powerful economy might mean it gives up the appearance of mercantilism but keeps the same operating mode of centralized industrial planning. And that means state subsidies. China can work around the U.S. on this as provincial leaders can do what they want regarding lending and lending support to favorite industries. Beijing can throw them under the bus only when necessary.
“We think Beijing will lump in higher tariffs with the cost of doing business in the U.S., at least in the near term. We do not expect any quick deals to resolve these ongoing tensions,” says Vladimir Signorelli, founder of Brettonwoods Research, a macro investment research firm in New Jersey.
Some early indications from Beijing suggest a quid pro quo approach is likely. Earlier this month, China announced that beginning May 1 China would ban the export of all fentanyl-related products to the U.S., a leading cause of heroin addiction. These and other token steps suggest that it may be an accord in name only and not much more. Additional time is likely necessary for a fuller agreement, and Xi has all the time in the world.
“We’ve seen China grow to incredibly high levels of double diigits, and everyone knew it would come down to Earth someday, but we never thought China would crash,” says Andrew Miller, CIO of Mondrian Investment Partners. “Our view was that GDP stabilizes around 6% and very gradually eases down over the next five to ten years,” he says about the hard landing that wasn’t.
Miller is not too worried about a hard landing. The trade war will cause volatility, giving investors a good chance to buy China cheaply.
“Trade war or not, we believe the china consumer will get wealthier over the long term, urbanization will increase, and we are just going to invest in companies that will benefit from that,” Miller says.