As usual, there was a lot to unpack in Donald Trump's tweet. The US president claimed that American tariffs were having a "major effect" on the Chinese economy, which this week posted its lowest level of gross domestic product growth for nearly 30 years.
"China's 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving," Trump tweeted.
Some of this is perhaps half true. Several companies — including US tech behemoths such as Apple — are indeed considering shifting part of their supply chain out of China. And, yes, this potential shift is driven partly by the US-China trade war.
But the overall message of Trump's tweet — that US tariffs are dragging China down — relies on a simplistic reading of what animates China's economy. The reality is that China's dynamism these days comes mostly from within, from investment and consumer spending. Trade has long since ceased to be more than a bit player in China's growth story.
"The Trump tensions have contributed to slower growth in China, but the biggest impact has been on sentiment rather than directly from trade," said Andy Rothman, investment strategist at Matthews Asia. "Remember that last year, net exports accounted for less than one per cent of China's GDP."
Thus, Trump's claim that US tariffs have had a "major effect" is overblown. Equally misleading is the idea that Chinese growth has taken a big hit. Economic expansion of 6.3 per cent in the first half of this year, down from 6.6 per cent over all of 2018, hardly constitutes a rout.
When such numbers are expressed in US dollars, the vacuity of Trump's words becomes clear. Last year, China added US$1.45 trillion to its US$13.6t economy, making it by far the biggest national contributor to global GDP.
For context, the extra US$1.45t in economic output that China managed in 2018 is roughly equivalent to the size of the Spanish or Australian economies. Even if China manages only 6.3 per cent growth this year, it will have added another "Spain".
Such comparisons help to put the importance of China's economy into context. But they do not take account of the country's manifold frailties, many of which lie intentionally obscured beneath upbeat official narratives.
The main structural drags on Chinese growth are homegrown. They are hangovers from blistering stimulus binges launched since the 2008 financial crisis that have sent debts skyrocketing to levels which now limit Beijing's policy options.
Total debt in China stands at over US$40t, or close to 310 per cent of GDP, according to the Institute of International Finance. This represents an explosion from levels of just over 150 per cent in 2008, revealing that much of China's golden decade was borrowed rather than bought.
The frailty has forced Beijing to temper its ambitions. Officials routinely warn over the risks that could erupt from a vast, unregulated shadow finance system. Local governments, meanwhile, are navigating what S&P analysts Gloria Lu and Laura Li call a "debt iceberg with titanic credit risks". Households are also increasingly maxed out.
The upshot of all this is that Beijing no longer enjoys the luxury of being able to buy growth by deploying credit to spur unchecked asset price inflation. Such limitations help explain why Beijing appears set against a return to the go-go policies of 2009 and 2015.
Several analysts think that if a stimulus is launched to stem ebbing growth later this year, it will be a limited, piecemeal affair.
Staying Beijing's hand over the liquidity spigot is the knowledge that more credit will inflate housing prices further out of the reach of a swelling middle class. "History has proven that every country relying excessively on real estate for economic prosperity would eventually pay a heavy price," warned Guo Shuqing, China's banking regulator, in June.
Yet Chinese policymakers also know that when property prices ease, households feel poorer and rein in their spending, having an impact on the broader economy. So a balancing act results. When growth slips too much, tax cuts, rebates and judicious injections of liquidity are deployed. If things overheat, some goodies are withdrawn.
The only escape for China comes from boosting productivity. And it is this that gives Trump his leverage. Although US trade tariffs have little power to injure China, the prospect of a full-blown economic rivalry with the US that restricts Chinese companies' access to US tech looms as a potent threat.
Thus, says Rothman, China is likely to favour a resolution with the US to the trade war. Without one, Beijing will struggle over time to ascend the technology ladder, making productivity gains harder to attain.
Written by: James Kynge
© Financial Times