Trucks wait in line as shipping containers stand in a terminal at the Yangshan Deep Water Port in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

GDP Report Set to Show China's Fitness to Fight the Trade War

(Bloomberg) -- A key economic data release Monday will show how well placed China’s economy is to withstand the trade war.

At 10:00 a.m. Monday Beijing time the statistics authority will release China’s gross domestic product growth for the second quarter. The world’s second-largest economy expanded by 6.7 percent, according to economists surveyed by Bloomberg. That’s a notch lower than the 6.8 percent gain in the previous three-month period but still above the government’s full-year target of 6.5 percent.

A look beyond the headline number will reveal more early signs of the size of the impact from the trade dispute, or where the tariffs could end up hurting. If the confrontation with the U.S. deepens to the extent that it endangers the growth target, the government may be forced to soften its campaign to curb debt and clean up the financial system.

The origin of the U.S. dispute with China is the goods-trade surplus -- and that rose to a record in June. The gap with rest of the world offered the economy a small, yet important, lift last year and enabled the first annual acceleration since 2010. That’s also where the trade confrontation may show up.

GDP Report Set to Show China's Fitness to Fight the Trade War

Net exports may end up being a drag on the nation’s growth in the first six months of this year, when the services trade is taken into account. While Chinese factories ship goods abroad, its consumers are increasingly spending on foreign education, tourism and movies, and those factors have affected the current account.

One of the three contributors to GDP, net exports weighed on the expansion by 0.6 percentage point in the first quarter. The economy gained 6.8 percent then, fueled by consumption and investment.

That may be the case again in the first six months, as economists including Larry Hu, at Macquarie Securities Ltd. in Hong Kong, forecasts the nation will run a current account deficit over that period. The total trade balance already registered a net deficit on a monthly basis in May.

GDP Report Set to Show China's Fitness to Fight the Trade War

Policy makers have continued the campaign to curb financial risk by shrinking the shadow banking sector and tightening regulation. Aggregate financing, the broadest gauge of credit, trailed estimates in June, as the the amount of money lent via the shadow-banking sector saw the biggest net monthly drop on record.

Investors can judge credit supply, or how successful the campaign is, by calculating the aggregate-finance-to-GDP ratio, which peaked in mid-2017. That gauge will show not only bank loans being channeled to bigger enterprises, but also some to companies that have limited access to formal borrowing.

GDP Report Set to Show China's Fitness to Fight the Trade War

Government and state-owned companies are spending at a slower pace than their private counterparts, even as state industrial firms earned robust profits and cut debt.

If the trade war indeed threatens the economy and the policy makers feel obliged to add stimulus, we may see public investment ticking up again -- local government will build more bridges and roads, and state firms will buy and expand.

GDP Report Set to Show China's Fitness to Fight the Trade War

Monday’s release will also include a report on industrial output, where growth is forecast to slow to 6.5 percent in June from 6.8 percent in May. Figures for electronic machinery and equipment, as well as communications equipment, computers and electronic devices, may show if tariffs are already denting output. The first round of U.S. tariffs are mostly targeted at technology products.

GDP Report Set to Show China's Fitness to Fight the Trade War

Retail sales -- covering both consumer and government spending -- rose at the slowest pace since 2003 in May. Reasons for that deceleration include rising household borrowing, slower wage growth and some pent-up demand due to a tax cut effective this month. Families expecting to buy imported cars -- except those from the U.S. -- may have waited until the tariffs were lowered to 15 percent from 25 percent this month.

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