The US-China trade war - a few early insights ahead of the BRICS Summit in Johannesburg

Chinese traders made admirable hay despite the escalating trade war with the US, as Chinese exports to the US rose from 11.6% y/y in May to12.7% y/y in June. Conversely, Chinese imports of US products slowed from 11.4% y/y in May to 9.6% y/y in June. The resultant, and also a record monthly, trade surplus of USD29bn sees China’s overall trade surplus with the US at USD134bn YTD, up 13% y/y. However, the data does not account for the ramifications of both countries effecting a 25% tariff on USD34bn worth of products.

Washington on 11 July announced targeting a further USD200bn worth of Chinese products. We therefore see the headwinds for bilateral trade picking up some more, and washing into the data in the coming months.

Both sides are confident of winning a trade war, which makes for unfettered trade tariffs and retaliatory measures, although driven by the US and merely countered by China. Even so, China sees the trade war crimping China’s growth to 6% in Q4:18, from 6.8% in Q1:18, which it considers acceptable.

Perhaps this is optimistic. Even before the punitive tariffs, we expected China’s economic growth to slip, to 6.6% in Q3:18, then to 6.3% in Q3:18, and to 6% in Q4:18. Granted, trade is a less important component for China’s economy than before. Net exports detracted from GDP growth for all but one of the past 13 quarters – however, the US is destination to 18% of Chinese exports.

We have held a positive outlook for manufacturing in 2018 – profits increased by 21% last year – which supported our constructive view for private sector fixed asset investment. But the trade war is a serious headwind because many of these firms are connected to external markets; 85% of China’s exports are manufactured goods.

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