From Europe, China’s Growth and Trade Issues Look Permanent

(Bloomberg) --

One of Europe’s gloomier takes on the Chinese economy is built on the assumption that growth won’t see a meaningful pickup and trade issues are probably here to stay.

Analysts at Commerzbank, Germany’s second-largest lender, completely overhauled their outlook and say they no longer expect China’s stimulus program to translate into significantly faster growth. While many forecasters had expected the economy to react to tax cuts and more abundant lending, the researchers argue recent events signal China may even accept a slower pace of expansion on purpose.

The government will unlikely boost its current, moderate support, chief economist Joerg Kraemer wrote in a note. Previous efforts have led to high corporate-debt levels, which authorities have acknowledged as a problem.

“The government merely wants to prevent an undershooting of GDP growth -- nothing more,” he said.

The revised call follows China’s move earlier this week to let its currency weaken below the closely watched level of 7 yuan per dollar after new U.S. threats to raise tariffs. In response, the U.S. labeled China a currency manipulator.

With no indication of a speedy resolution of the conflict, the repercussions reach far and wide. Economic growth in Germany and the euro area will be significantly weaker next year than previously expected, according to Commerzbank’s analysts. They now see the region expanding only 0.7%, down from a previous call for 1.1%.

Commerzbank’s argument is that the political risk of accepting permanently lower growth is manageable for Chinese authorities, particularly because they can blame U.S. President Donald Trump. Nationalist sentiment in the country may strengthen citizens’ resolve to stand firm against external pressures as the government continues to prioritize domestic demand and decrease its dependence on the West.

“With the devaluation of its own currency, China has this week introduced a new weapon into the trade war,” Kraemer wrote. “China wants to rise, and the U.S. wants to prevent just that. This conflict is difficult to resolve. It will probably become a permanent phenomenon that could shape the coming decades.”

©2019 Bloomberg L.P.

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