China’s Trade Shows Healthy Growth, Really?

China’s trade in goods climbed 8.9% year-on-year to CNY 9.11 trillion (USD 1.43 trillion) in the first four months of this year, partly due to the upturn in the global economy and solid domestic demand, official data showed on Tuesday.

Exports rose 6.4% year-on-year to CNY 4.81 trillion between January and April, while imports grew 11.7% to CNY 4.3 trillion, according to the General Administration of Customs.

The robust trade performance can be attributed to the steady recovery of the global economy, and sustained domestic demand, said Huang Songping, spokesman for the General Administration of Customs.

China’s trade grew in a more balanced manner, as the nation has been stepping up efforts to boost its imports, Huang was quoted as saying by China Central Television on Tuesday.

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The trade surplus stood at CNY 506.24 billion in the first four months, which narrowed by 24.1% from the same period a year ago, data showed.

“Looking ahead, China’s imports are likely to be further underpinned by further opening-up measures such as tariff reduction, and a slew of policies to stimulate domestic consumption,” said Cai Hao, head of macroeconomic study at the Research Institute of Hengfeng Bank.

After getting off to a strong start, China’s foreign trade volume is forecast to remain strong in 2018, according to a report recently released by the Ministry of Commerce.

The report said the expansion would be underpinned by the stable recovery of the world economy, and sustained demand in the domestic market as supply-side structural reform advances.

In spite of the positive outlook, the report pointed out several factors that weighed on trade are still present. These include a complex international political and economic environment, anti-globalization, and rising protectionism.

A World Trade Organization report also pointed out that there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.

“Sino-US trade talks will continue to have a significant impact on both bilateral and global trade, and good economic and trade relations between the world’s two largest economies are vital for continued economic growth and recovery”, Nie Wen, a macroeconomy analyst at HwaBao Trust, said in a research note.

China’s trade with economies participating in the Belt and Road Initiative was worth CNY 2.51 trillion in the first four months, an increase of 11.6% year-on-year, which was 2.7% points higher than the overall level.

In April, China’s trade registered growth climbed 7.2% year-on-year to CNY 2.36 trillion, with exports increasing 3.7% and imports growing 11.6%.

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How bad could a trade war be for the global economy?

Since the Trump Administration proposed the tariff policy against Chinese imports, there are all kinds of comments, good or bad.

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China’s response to US tariffs has been measured but the end game is uncertain.

Chinese response to the Trump’s announcement was at the dovish end of the spectrum of possible retaliatory actions. If we have seen the first shots in a global trade war, then there are many rounds of escalation still to come, probably taking years to play out. 

So, how huge the scale of the economic damage will be?

The IMF has published simulations on its global economic model, showing the impact of a 10 per cent extra US tariff on all imports of goods from the rest of the world. This cuts US GDP by about 1 percentage point in the long term, and it also reduces GDP in the rest of the world by 0.3 per cent. There is no transfer of output from one region to another: everyone loses.

The tariff increases are estimated to reduce global trade volumes by around 6 per cent, and real GDP is reduced by 1.4 per cent, with the US, China and Europe each suffering a drop-in output of 1.7-2.2 per cent. Since these trade and output losses are likely to be spread over several years, the size of this shock would seem manageable, and maybe a bit less than investors currently fears.

Other simulations are broadly similar. Goldman Sachs economists have published results that imply output losses of around 0.9 per cent over two years for the US and Europe in the case of a 10-percentage point increase in global tariffs, along with a 20 per cent drop in equity prices. China’s output loss is only 0.5 per cent. Inflation rises by a few tenths of a per cent, but then drops back to target as monetary policy tightens and unemployment rises.

There are two obvious ways in which the economic impact could be much worse:

1.    The huge growth in global value chains early in this century (i.e. trade in parts and components rather than finished products) could leave the trading system vulnerable to much greater temporary disruption if there are bankruptcies and dislocations in companies within the GVCs. Tariffs could be imposed every time components crisscross a frontier, greatly increasing the effective costs of production in GVCs.

2.    Uncertainty about future tariffs and their effects could lead to postponement of capital investment decisions, resulting in a much larger immediate hit to GDP than shown in the above simulations.

In summary, the available (though not very convincing) evidence suggests that the global output losses from a trade war might reach 1-3 percentage points over several years, with a left tail that could be much worse. But there are huge uncertainties, both economically and politically. If this strategic game gets stuck in a bad equilibrium, then markets might become disposed to assume the worst.

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U.S. manufacturing giant sees growing importance of China market

Due to the country's sustainable growth and vast infrastructure and housing needs, China continues to be an important market for Caterpillar for the foreseeable future, CEO of the leading U.S. manufacturer of farm and construction equipment has said.

"We're encouraged by the continued growth in China for the first half of 2017, primarily driven by increased infrastructure and residential investment," Jim Umpleby told Xinhua in a recent interview.

China's GDP grew faster than expected in the first half of the year, up by 6.9 percent from a year earlier, according to data from the National Bureau of Statistics.

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"With the Chinese government's new development model as outlined in the 13^th Five-Year Plan, we see business growth potential in the continued government investment in infrastructure development, energy reform and urbanization," said Umpleby.

The Illinois-based company announced in July that its second-quarter sales and revenues up by 1 billion U.S. dollars from a year ago, beating market expectations. Shares of Caterpillar soared after the release of earnings report.

"While a number of our end markets remain challenged, construction in China and gas compression in North America were highlights in the quarter," Umpleby said in the report.

Caterpillar's Asia/Pacific quarterly sales increased 25 percent primarily due to an increase in construction equipment sales in China resulting from increased infrastructure and residential investment.

"China has vast infrastructure and housing needs, and we believe it will remain an important construction equipment market for Caterpillar for the foreseeable future," Umpleby said.

"Sales in our construction and mining segments are doing well. In fact, we've seen a noticeable uplift in sales of excavators," he added.

In August, Caterpillar celebrated the sale of 20,000 mini hydraulic excavators in China.

The momentum in the company's excavator sales in the first half of 2017 is a good indicator of that growth, driven by a combination of robust infrastructure and building construction activity as well as higher replacement demand.

"We see continued construction growth opportunities over the medium and longer term in China," said Umplebly.

Meanwhile, Caterpillar has been widely involved in the projects under China's Belt and Road Initiative.

"With our significant manufacturing footprint in China, a global dealer network and a financial service network to support our customers along the Belt and Road routes, we are working with Chinese SOEs in 20 countries on projects ranging from roads, ports, mines and oil fields," said Umpleby.

The U.S. manufacturing giant has made a long-term commitment to China and has been one of the strong supporters of the Belt and Road Initiative.

"A notable opportunity within energy for Caterpillar, China continues to build out its natural gas infrastructure with the country's announced intentions to develop shale resources," he said.

When talked about trade ties between China and the United States, Umpleby said, "The trade relationship between the U.S. and China is important to the global economy and to Caterpillar."

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