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ECONOMY: OPTIMISM but not for long
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OPTIMISM but not for long
By Morgan Brady

BT 201911 ECONOMY 10Optimism was in the air, but not for long. Trade talks seemed to pave the way for good news, but results were lacklustre. Some indicators are pointing in a promising direction, but not all. It seemed that recent positive developments were simply short-term bouts of positive sentiment, and they did not indicate a long-term change in trend and reversal of the ongoing slowdown.

Improvement in the manufacturing sector

BT 201911 ECONOMY 02Two indicators, that are usually used to gauge the health of the manufacturing sector, have printed readings above expectations. The first, China’s official manufacturing purchasing managers’ index, showed a reading of 49.8, which is above expectations of 49.5. This indicator has been showing a reading of below 50 for five months in a raw, indicating contraction. The indicator focuses on large business and state businesses. The second indicator, which is a private one that focuses on small and medium size businesses, the Caixin/Markit factor purchasing managers’ index (PMI) showed a reading of 51.4 for September. This is the highest reading since February, 2018, and it is higher than the expected 50.2 by analysts. It indicates growth among SMEs.

It seems that large businesses are facing struggles, perhaps in their international operations, whereas small and medium businesses seem to be growing. The growth of SMEs is usually good, as it generates job opportunities and increases social security.

A worker makes a bicycle rim on Sept. 2 at a sports equipment factory in HangzhouA worker makes a bicycle rim at a sports equipment factory in Hangzhou

This is important to Central policymakers, according to one analyst. Authorities have recently been emphasizing the strong growth in the domestic market. Faster construction of infrastructure projects, better implementation of upgrading the industrial sector, and tax and fee cuts are likely to offset the influence of the subdued overseas demand and soften the downward pressure on China’s economic growth. Small and medium size businesses have probably benefited from this support.

Prices of means of production

BT 201911 ECONOMY 03During the last 10 days of September, the prices of different means of production have fluctuated. The prices of rebar, angle steel, gasoline, rice and wheat have increased, whereas the prices of corn and cotton have decreased, in comparison with mid-September, to mention a few examples. In summary, the prices of 18 kinds of products increased, whereas those of 22 kinds decreased, and those of 10 kinds remained at the same level, compared with that in mid-September 2019.

It is worth noting that the trade war has two types of effects: the first is material and tangible, and the second is psychological. When businesses are uncertain about the future, they tend to hold back from investing and capital flows decline. Then a chain of reactions begins and economic activity slows down as a result. Both the tangible and psychological impacts of the trade war can be felt and they lead in general to a deteriorating growth outlook.

BT 201911 ECONOMY 04The trade war is not only about the tariffs, but it also includes other, perhaps more important, elements, such as the permission granted to Chinese businesses to access the US markets, to acquire companies in the United States, to transfer intellectual property (IP) from the United States to China, or to conduct research in the United States. All of those elements combined can take a toll on the Chinese economy, and while the issue of tariffs has received enough attention and is being negotiated, other issues have not received equal attention.

Trade data

BT 201911 ECONOMY 05Trade data showed that both exports and imports fell more than expected in September. China’s exports that are denominated in US dollar declined by 3.2% on a year-on-year basis. Imports declined by 8.5 percentage points. The country registered a trade surplus in the amount of $39.65 billion.

When looking at trade denominated in Yuan, China’s exports declined by 0.7 percentage points on a year basis, whereas imports dropped by 6.2%.

BT 201911 ECONOMY 07In the overall, exports declined by 2.8%, while imports declined by 6% on a year-on-year basis in September. Trade data had shown a decline, as well, in August.

Although a recent trade deal has been announced, its scope was small, and there was discrepancy between what each party was saying. According to President Trump, the deal entails China buying agricultural products from the US in the value of up to $50 billion. The deal also involved addressing concerns regarding intellectual property infringements and artificial manipulation of exchange rates. China, however, requested to talk further. Market sentiment quickly deteriorated.


BT 201911 ECONOMY 09Legitimate concerns linger. The trade war is still on-going, and China’s trade data shows that the country’s exports and imports are taking a hit. Prices of many means of production decreased (although some increased, and others remained unchanged). Larger manufacturing companies seem to be suffering the most, whereas small and medium size businesses seem to be less exposed. The resilience of the Chinese economy is being put to the test, both in terms of policy and in terms of the performance of different businesses in the face of adversity. There is reason for optimism, however, which is that both parties, the US and China, benefit from a potential trade agreement. This pressure could possibly lead to an agreement in the last minute, before time runs out.

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