Misreading China’s Strength
The US believes that with Chinese growth slowing, China's leaders are desperate for a deal to end the bilateral trade war, regardless of when the current 90-day truce actually ends. But the two economies’ longer-term fundamentals compel a very different verdict about which side has the upper hand.
NEW HAVEN – US President Donald Trump’s administration has underestimated China’s resilience and strategic resolve. With the Chinese economy slowing, the US believes that China is hurting and desperate for an end to the trade war. But with ample policy space to address the current slowdown, China’s leadership has no need to abandon its longer-term strategy. While a cosmetic deal focused on bilateral trade appears to be in the offing, the sharp contrast between the two economies’ fundamental underpinnings points to a very different verdict regarding who has the upper hand.
Yes, the Chinese economy has weakened significantly in the past few months. But, contrary to US perceptions that this is due to its successful tariff strategy, China’s downturn has been largely self-inflicted. It was initially brought on by a deleveraging campaign aimed at neutralizing the mounting risks of debt-intensive economic growth. To their credit, Chinese policymakers have moved aggressively to avoid the dreaded Japan syndrome – not just a debt overhang, but also a profusion of zombie companies and related productivity challenges.
Largely as a result of this effort, credit growth has moderated from around 16% at the start of 2016 to about 10.5% in late 2018. This has had marked repercussions for China’s once-powerful investment engine, the largest component of the economy, which has slowed from 20% growth in late 2013 to about 6% in late 2018.