....a good analysis by Michael Pettis from the Carnegie Endowment who probably understands China as well as ex-Morgan Stanley Asian head Stephen Roach.
....China's ability to maintain strong trade surpluses to keep its production engine going to generate the desired economic growth in the absence of the role its property sector previously contributed, is likely to be threatened by Trump administration's policies.
....and I believe it explains why China has been reluctant to date to boost mega stimulus towards consumption, its because they could be saving it for the time when Trump adversity arrives, so that they have means to respond to satisfy its populace in the midst of economic difficulty.
....all these underscores why the eventual crimping of China's trade surpluses by Trump's tariffs would have an indelible adverse impact on our exports, our Aussie dollar and our GDP. There's no escaping China troubles for us as China makes up 40% of Australian exports.
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This Bloomberg article illustrates the problem China and the world face: "Steel exports from China hit the highest level since 2015, risking further frictions with trade partners as Chinese mills boost overseas shipments amid weak domestic demand."
Both sides are in a very difficult position. China has shown itself completely unable to boost the domestic consumption share of GDP, even as it continues to maintain economic activity the only way it knows how – by boosting domestic production.
That's why it must export the balance. It it can't, it will be forced to close down production and fire workers, in which case China's rebalancing towards a greater role for domestic consumption will involve a fall in consumption and a greater fall in production (GDP).
Until China gets serious about rebalancing its economy without a sharp contraction in growth (which, in the best of cases, will take many years), it needs to maintain high trade surpluses. Without these high trade surpluses, either Chinese investment must rise even higher...
or Chinese savings must fall. The former makes no sense. As Martin Wolf recently noted, "An economy whose potential growth rate is 5 per cent at most will not invest more than 40 per cent of GDP productively". China already invests 43% of GDP.
But how can savings decline? There are only three ways to bring down savings. The best way is to sustainably raise the consumption share of GDP by growing consumption faster than GDP. This, however, is almost impossible to do quickly.
The second way is to increase household or government debt aimed at boosting consumption, which Beijing says it doesn't want to do but seems intent on doing, at least until it no longer can. And of course the third way is with factory closures and rising unemployment.
The point is China urgently needs large trade surpluses to protect it from having to choose between rising unemployment, as it closes down production, and even faster increases in debt, as it borrows to fund either consumption transfers or more unproductive investment.
But with a deficit already equal to 1% of its GDP, it is pretty clear that the rest of the world is not interested – and probably not able – to absorb existing Chinese surpluses, let alone bigger ones. What's more, if the US were to reduce its own trade deficit (roughly...
half of global deficits), even existing Chinese surpluses will become unbearable for the rest of the world, let alone those also of Japan, Germany, the Netherlands, Taiwan, South Korea, and so on. Something has to break, and I assume it will be the global trading system.
