Weekly Financial Review #23

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Broken China

A slowing economy and trade war with the US has investors worried – and the value of China’s stock market and currency is continuing to fall.

 

Recap

  • In April, the US announced import taxes targeted at China, kicking off rounds of counter-tariffs. > Read our story

  • China’s economic growth began to slow in the summer. > Read our story

  • By October, the economy’s growth had spluttered to its most sluggish pace in a decade. > Read our story

  • This month, Alibaba lowered its sales expectations, blaming an uncertain Chinese economy. > Read our story
  • And data out last week showed Chinese exports to the US surprisingly rose in October, despite increased tariffs. > Read our story

 

Connecting The Dots

The US wants to reduce its “trade deficit” with China – the amount it spends on Chinese goods beyond what China spends on American stuff, amounting to $376 billion last year. Import taxes (a.k.a. tariffs) go into US government coffers, helping fund its spending plans elsewhere – and they might discourage people from buying pricier Chinese goods altogether, bringing the trade balance closer to equilibrium.

For the Chinese economy, tariffs equal uncertainty. The country’s on a mission to reduce its reliance on the industrial sectors that made it a global force to be reckoned with, and to increase Chinese consumer spending as a proportion of the overall economy. That number’s currently around 40%, while in the US 70% of the economy is made up of consumer spending – and in the UK, it’s just under 80%. As American buyers perhaps look elsewhere for their machinery and widgets, the danger is that China’s old economic engine room peters out faster than the new motor cranks up – leading to slower economic growth.

That has an impact on the little guy, since if Chinese exporters aren’t sure how busy they’ll be, workers’ employment isn’t guaranteed. And people in insecure work are more careful how they spend their money. Alibaba blamed an uncertain economy for its lowered sales expectations (although Singles’ Day still broke records last week) – and Chinese online travel agency Ctrip’s stock plunged recently as investors worried that penny-pinching customers were canceling their holidays.

 

Takeaways

  1. China’s weakness is China’s strength.

    Investors concerned about China’s slowdown have, unsurprisingly, been less willing to invest in the country, reducing demand for its currency and thereby making it less valuable. For US buyers, however, the falling yuan means that, even with tariffs, Chinese products aren’t as expensive as they could be. This could explain why Chinese exports to the US rose in October – likely frustrating the US, whose president accused China of manipulating its currency in order to offset the effects of tariffs.

  2. There may be trouble ahead.

    Data released last week suggested China’s economy might be back on solid footing: industrial production (making stuff in factories) and fixed-asset (buildings and machinery) investment rose more than predicted in October, thanks to government spending. But there won’t be dancing in the streets of Beijing just yet. The US has promised to introduce even more tariffs in January – and raise existing ones – causing investors and companies alike to brace for more uncertain weather ahead.

 

Also On Our Radar

Uber would love to turn a profit ahead of the planned 2019 initial public offering which could value it at $120 billion. But its quarterly update on Wednesday was more screech than surge: revenue growth slowed to a 38% improvement on last year, while the company’s quarterly losses grew to $1 billion. Uber blamed its higher costs on getting its fun but deadly electric scooter rental business off the ground.

 

Reading For The Weekend

  1. The International Monetary Fund explains China’s economic rebalancing in six charts: Read more
  2. The Federal Reserve Bank of St. Louis details how China became an industrial powerhouse: Read more

  3. Fast Company asks whether WeWork is worth $40 billion – or $3 billion: Read more

 

 

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