Numbers, and with gusto


President Trump’s tariffs and other sanctions are hitting China at a vulnerable moment. The Chinese National Bureau of Statistics reported July 15 that gross domestic product grew by 6.2% in the second quarter, China’s slowest growth since 1992. The actual picture is much cloudier. Beijing has for years cooked the books to make the regime’s performance look better, and they are undoubtedly doing the same now.

No one outside the Chinese government knows exactly what is happening in China. But even the latest report concedes that “economic conditions are still severe both at home and abroad” and that “the unbalanced and inadequate development at home is still acute.” If that’s the official line, the real story is certainly far worse.

Even 6% growth would fall short of the Chinese Communist Party’s ambitions. While China has grown richer, it is still a relatively poor country. Per capita GDP is $10,000, below Romania’s. Even at 6% growth, it would take decades for China to catch up with its capitalist neighbors Taiwan ($26,000), South Korea ($32,000), Japan ($41,000) and Hong Kong ($49,000), let alone the U.S. ($62,000).

With declining growth, Beijing is reaping what it has sown. For two decades after the death of Mao Zedong, the party injected a degree of freedom into China’s moribund economy. But there is a limit to how much control the socialist regime is willing to sacrifice. It refused to create a private banking system or an independent legal system. It won’t privatize the vast state-owned enterprises that account for about 30% of China’s economy, serve the regime’s goals and enrich political elites.

Instead, for the past 20 years — and especially since the financial panic of 2008 — the party has generated growth through debt-financed investment and, increasingly, aggressive exploitation of the global trading system that amounts to stealing from other economies. Mr. Trump wasn’t far off when he called it “the greatest theft in the history of the world.”

The Chinese Communist Party’s policies created tremendous economic imbalances, saddled China with debt, and bred suspicion and disillusionment among trading partners. Even before 2016, many observers believed China was headed toward stagnation.

It’s against this context that the Trump trade policy has put such pressure on Beijing. The first wave of U.S. trade actions was announced in March 2018, and included strategic tariffs on Chinese products, restrictions on investment in several key industries, and a World Trade Organization case challenging Beijing’s institutionalized theft of technology and intellectual property.

When Beijing refused to meet U.S. demands, the White House increased the countertariffs, dealing another major blow to the Chinese economy. While trade talks will continue, Mr. Trump has now announced that the U.S. will impose a 10% tariff on an additional $300 billion in Chinese goods beginning Sept. 1.

The tariffs are working. Big tech companies are taking their manufacturing out of China; retailers are pulling out as well. The Chinese National Bureau of Statistics reports that in July Chinese factory activity declined for the third month in a row. That means fewer jobs. The South China Morning Post recently reported that economists at China International Capital Corp. , an investment bank, say China’s industrial sector has lost five million jobs in the past year, nearly two million of them because of the trade war with the U.S.

Exports so far this year have increased only 0.6% while imports, an indicator of domestic economic strength, fell at a 5.6% annual rate in July, according to China’s General Administration of Customs office. The U.S. Census Bureau reported last week that China dropped from being the top U.S. trading partner to third behind Mexico and Canada for the first half of 2019.

To weather the economic storm, Beijing resorted to devaluing its own currency — a policy that has helped keep the price of Chinese exports to the U.S. from rising due to the tariffs. But a cheaper currency probably won’t reverse China’s economic slump or encourage businesses to invest in the country.

Comprehensive reform from the Chinese Communist Party is unlikely in the near term. But the Trump administration has at least succeeded in substantially increasing the costs to the regime of its authoritarian and exploitative policies. For the first time in a long time, the pressure is really on Beijing, and the initiative in the national competition between China and the U.S. finally belongs to Washington.

BTW, this is an opinion piece by a CEO, hence the plain language about cooked books, etc. And things are nice in Hong Kong too.

One Response to “Numbers, and with gusto”

  1. feeblemind Says:

    China’s Currency Devaluation Will Hurt China More Than It Hurts The United States

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