When it comes to “strategic competition” between the world’s two largest economies, Xi Jinping’s doing a bang-up job — of keeping the US in pole position. China’s losing, and Xi’s resorting to the usual quasi-chicanery to stanch the bleeding.
A flood of crucial data on Monday showed Chinese economic growth was tepid by the country’s standards last quarter, while the consumption impulse faltered further in June, underscoring Beijing’s seemingly intractable domestic demand problem.
GDP growth was just 4.7% for Q2, a marked deceleration from the prior quarter’s pace and the worst since Q1 of 2023.
I realize the (implausible) smoothness of the quarterly prints (notwithstanding some volatility around the onset of the pandemic and the Shanghai lockdown in 2022) makes it difficult for the casual observer to delineate between “good” and “bad” results, but take my word for it: 4.7% counts as a bad result. So bad, in fact, that just one forecaster in a poll of nearly 30 “professionals” saw a print that low.
“The economy is limping along,” SocGen’s Wei Yao and Michelle Lam sighed on Monday, describing “severe imbalances.”
Although the implied deflator moved higher, it was still negative. Nominal GDP growth was just 4% in Q2. The QoQ growth rate wasn’t even half of the Q1 sequential rate.
The retail sales readout for June, released alongside the Q2 GDP figures, was abysmal. The 2% YoY increase was the worst showing since December of 2022, when sales contracted as the country crashed out of Xi’s “COVID zero” dystopia.
That print — 2% — constituted a wild miss. Consensus wanted 3.4% from the retail sales update.
Industrial production, by contrast, beat with a 5.3% gain. June marked the sixth straight month during which the growth rate for industrial output outstripped retail sales growth.
The juxtaposition between IP and retail sales is glaring. Xi is plainly — nakedly, flagrantly — running the industrial sector out ahead of what China’s able to sell domestically in order to flatter growth. In other words: He’s intentionally fostering an overcapacity problem, which he’s then foisting on the rest of the world.
That’s why nobody trusts Xi. Well, it’s one reason. There are more. Many, many more. But this is the sort of thing China hawks mean when they say the Party’s duplicitous. Xi says one thing then turns right around and does another. He doesn’t deserve the benefit of the doubt. On anything.
Do note: China’s trade surplus hit a new record in June at more than $99 billion, eclipsing the July 2022 high. Exports rose nearly 9% last month from the same period a year ago, the best result in over a year. Imports, by contrast, fell 2.3%.
“Industrial production moderated [but] was still healthy for Q2 as a whole, supported by export demand and restocking,” SocGen’s Lam remarked. “Again, we see better performance on export-oriented sectors, such as computer and electronics and autos.”
Again: This is why so many Western politicians and policymakers are quick to cast aspersions. China’s flooding the world with cheap goods it can’t sell at home, thereby making everyone else compensate for the Party’s domestic policy failures.
Readers often ask why Americans shouldn’t have an opportunity to buy — for example — a duty-free Chinese EV for a rock-bottom price. This is why. In doing so, you’re subsidizing a brutal dictatorship which is plowing money into the single-fastest military build-up since the Third Reich. China’s surplus with the US in June was the most bloated since January of 2023.
While Xi was busy shipping cheap Chinese cars all over the world last month, vehicle sales at home plunged more than 6%. Domestic sales of household appliances dropped nearly 8%. And on and on.
Expect more tariffs. Both in the US and in the EU. It took a while (decades, actually) but Washington and Brussels are by now wise to these sorts of tactics. If Xi keeps at it (and he will), he’ll perpetuate existing trade wars. And he’ll start new ones. Then the Party’s propaganda machine will blame everybody else.
Paradoxically, expectations of more tariffs could juice China’s export machine in the near-term — and indeed that probably accounts for some of the strength in May and June — but again, Xi’s fostering ill will with this strategy. More ill will. There’s already plenty of it.
Top party brass are gathered this week for the Third Plenum. Expectations for major economic policy announcements are low.
Analysts aren’t mincing words anymore. “While exports remain on a decent uptrend, the deceleration in retail sales and across many items was just shocking,” SocGen’s Lam wrote. “Against the backdrop of weak demand and supply-side push, deflation risks remain acute.”
Governments stood by. But who was “responsible” for moving production and hiring offshore to Mexico, Canada (autos) and then China? Were there Mexican cartel members or Chinese police in US and EU corporate board room forcing them to do so?
Sorry, but shareholder return demands from we investors were as responsible as anyone. Along with the “free markets” ideology in the USA, as in “We don’t pick winners. Don’t you remember Solyndra?” Most nations do.
I call what you mention the “Tyranny of the Market.” It drives most of all C-Suite thinking, sadly. We live in a sea of tyrants.
Contrast: when Japan came under pressure from American politicians in the 80s for the damage cheaper (and better) Japanese autos were doing to the American car industry, Japan instituted voluntary export restrictions while MITI encouraged Japanese auto makers to build manufacturing capacity on American soil.
Japan was and is a US vassal state.
In my experience that view was not shared by the Japanese during the time referenced by WMD above.
I was on the ground in Asia then. The LDP etc knew damn well that they’d better do it if they wanted the military shield to remain in place. Plus they were much more dependent on the US market back then.