China’s Problems Keep Piling Up With Trump, Economy, and Markets

(Bloomberg) -- Stock-market turbulence and a sharper-than-expected economic slowdown are ratcheting up pressure on China’s leaders, just as Donald Trump does the same.

A day after the Shanghai Composite Index plunged to a four-year low and Trump took new steps to escalate his trade war with Beijing, third-quarter growth figures showed China’s economy expanding at the weakest pace since the depths of the global financial crisis in 2009. Faced with a growing panic in the stock market, the chiefs of China’s market regulator, central bank and financial watchdog all issued statements calling for investor calm.

Economic policy makers including Vice Premier Liu He, who also weighed in on Friday, are now left walking a tightrope. To fortify the nation’s negotiating position on trade with the Trump administration, they need to stem the $3 trillion stock rout and support growth at home -- all without giving up on their goal of containing soaring debt levels.

"China is under pressure on multiple fronts," said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. "Logically, all this pushes China to make a deal, yet I don’t think there is a deal to be had."

While the Shanghai Composite opened lower on Friday morning after the officials’ statements, it rallied in the afternoon and closed with a 2.6 percent gain. Some investors speculated that China’s “National Team” of state-backed funds stepped in to add some oomph to policy makers’ verbal intervention.

China’s stock market is still the world’s worst performer since January -- losing nearly enough value to wipe out the combined market capitalization of Brazil, India and Russia. Losses in China have largely been fueled by concerns over trade and economic growth, but the rout accelerated this month amid a wave of forced selling by leveraged investors. About $600 billion of Chinese shares have been pledged as collateral for loans, leaving their owners vulnerable to margin calls as prices sink.

Friday brought fresh reasons for stock investors to worry about the economy. Weak industrial output and what the government called the "severe international situation" were key factors behind the third-quarter slowdown, with year-on-year gross domestic product growth slowing to 6.5 percent from 6.7 percent during the previous three months. That trailed the 6.6 percent estimate in a Bloomberg survey of economists. Industrial output growth weakened to 5.8 percent in September from 6.1 percent in August.

Still, there are reasons for optimism. Friday’s retail sales numbers surprised on the upside, climbing at a 9.2 percent pace in September versus the 9 percent forecast. Growth may soon get a boost as a slew of stimulus measures, including central bank reserve-ratio cuts, start to filter through the economy. Local authorities are also raising $1.35 trillion yuan in special bonds to invest in infrastructure -- a sign that a previous deleveraging drive is being softened.

At the same time, external challenges are rising. The International Monetary Fund cut its forecast for global growth this month, the first time in more than two years, noting that some of the risks from higher tariffs have started to materialize.

Rising U.S. interest rates, a stronger dollar and tumbling currencies are rattling emerging markets, adding to uncertainty as Trump prepares to slap higher tariffs on China’s exports in January.

"There is a feedback loop here," said Andrew Polk, co-founder of research firm Trivium China in Beijing. "Broad emerging market challenges are reinforcing China’s slump, which is reinforcing broad emerging market challenges. Chinese growth will continue to slow in 2019, coming in sub-six percent in our forecasts. So there is not a clear way to break out of this feedback loop."

Trump escalated the confrontation with China this week with plans to withdraw the U.S. from a 192-nation treaty that gives Chinese companies discounted shipping rates for small packages sent to American consumers. The National Association of Manufacturers said the discounts amount to a subsidy for Chinese shippers that cost the U.S. Postal Service $170 million in 2017.

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U.S. and Chinese officials also clashed at a World Trade Organization gathering in Geneva this week over how to reform the global trading system. Deputy U.S. Trade Representative Dennis Shea said the WTO must confront China’s trade abuses while rethinking its preferential rights as a developing nation. Chinese Ambassador Zhang Xiangchen countered that “no one can be singled out” and that Beijing will not back any effort to undermine the WTO’s basic principles.

Many analysts say that substantive talks between the two sides will only be possible after U.S. mid-term elections in November.

"While the Chinese economy remains resilient to the impact of the trade war, helped by strong domestic consumption growth, a key risk to the outlook would be if President Trump implements a further round of tariffs on China," said Rajiv Biswas, Asia Pacific chief economist at IHS Markit in Singapore. "China’s export sector remains heavily reliant on the U.S. market."

--With assistance from Miao Han, April Ma, Dandan Li, Yinan Zhao, Natalie Lung and Richard Frost.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net;Lucille Liu in Hong Kong at xliu621@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Michael Patterson

©2018 Bloomberg L.P.

With assistance from Editorial Board