China's Economic Struggles: A Slowing Giant Faces Global Challenges

China has significant problems that we do not hear about in mainstream media. According to the Kiplinger Letter (Vol. 101, No 42), China is slowing its economic growth period. It will likely miss its 5% GDP growth target for this year. Remarkably, growth came in below Beijing's official goal. This is an absolute failure to live up to what the Communist Party has dictated.

Chinese manufacturing is still contracting, but foreign investment is supposed to fall for the first time since 1990. Chinese consumers are skittish and do not spend their money.

The root of China's woes is a real estate bust that hit a few years ago and is nowhere near the bottom. Unlike in the US, where house prices have been up sharply since the pandemic, boosting household wealth, Chinese households have lost $18 trillion as the values of their homes have fallen. In China, property is the middle class's preferred asset to own, whereas Americans are more financially diversified.

There's probably not much Beijing can do to turn the economy around. So far, it's mostly relying on monetary stimulus, lowering borrowing rates, allowing smaller down payments on homes, making more cash available to borrowers, etcetera. China may soon announce new spending programs, too. But all of this seems like a stopgap solution.

One thing we can expect from China is their familiar playbook. They will rely on exports, up by double digits this year. They will encourage exports by lifting demand for raw materials and boosting commodity prices.

The rising tide of cheap Chinese exports is intensifying global trade conflicts. More tariff barriers are targeting Chinese goods. Canada just levied a 100% tax on Chinese electric vehicles plus 25% duties on Chinese steel and aluminum imports. The European Union may soon follow suit on tariffs on EVs, and the expected tariff rate will be up to 35 1/2 percent. Either U.S. presidential candidate is bound to impose additional tariffs on China. We expect Donald Trump to impose broad tariffs while Kamala Harris will do it in a more targeted way. Each of them would cite unfair economic competition and national security concerns.?

US importers are already diversifying away from China, whose products now make up 15% of imports here, down from 21% in 2018. Businesses that rely on cheap Chinese goods will have fewer assets. The same is true for US consumers, from whom cheap Chinese products took some steam out of the inflation period in the long run. In the long run, though, it could also give American manufacturers a shot to regain market share.

We expect that relations between Beijing and Washington will worsen as China struggles to reboot its export-driven economic model.