In this last and fourth quarter of the year, the possible negative economic consequences of the U.S. trade war against China should start to be visible in the Chinese economy. In context, one should remember that the Chinese GDP growth is already heading lower. I argue that an annual GDP growth of 6 pct. faster becomes the reality than the financial markets expect, however, the development is not primarily a consequence of the trade war, but the domestic developments.
In this regard, the former head of the Chinese central bank Zhou Xiaochuan made an interesting comment to the press recently. He referred to the government’s economic models which show that the trade war, at maximum, will reduce the Chinese GDP growth rate with 0.5 percent points.
In my view, the main reason behind the lower growth is the deleveraging in the Chinese economy via debt reduction. This, for example, includes a control of the province’s borrowing, and a limitation on the famous public investment in infrastructure.
The government is monitoring this closely, where recent figures show that in the first eight months of the year, investments in infrastructure increased by 4.2 pct., but until end of July, the annual increase was 5.7 pct. This represents a decent slowdown within just one month.
What’s exciting is whether the government is brave enough to stand firm concerning the deleveraging, as expectations among businesses are still pointing down, which results in a two-fold pressure on the GDP growth.
At the moment, privately-controlled companies seem to reduce the number of employees, and a decrease in received export orders over the past six months – these developments all speak for a faster decrease in the Chinese GDP growth than expected in the financial markets.
India also feels the cold wind from the United States, but it is not due to president Trump and the trade war. India’s problem originates further down the road in Washington D.C. where the U.S. central bank (Fed) has its headquarters. The tightening in the American monetary policy now, as expected, begins to become noticeable in Emerging Market countries such as India.
The rupee has now reached a historical low towards the dollar. As the graphic shows, the momentum in the weakening has significantly gained pace its since mid-February, with a drop of 15 pct. during that period.
Such a move has also been seen in other countries, but it should not be ignored that India is Asia’s third-largest economy, and therefore it has a significant implication if India is moving towards a currency crisis. There are some classic signs of this development happening, as the country for example, continuously experiences capital flows.
It feels almost ironic that the country’s own central bank governor, Urjit Patel, predicted the risk of currency outflows in a column he published in the Financial Times a few months ago. I considered the timing as a preparation for the first-rate increase in India since 2014, i.e. it was a way of communicating it to the Indian business and financial markets.
Since then, the central bank again raised the interest rate in August. But now, more increases may be required, which will lead to some worrying comments from the country’s business community.
Prime Minister Modi’s government is trying to patch the problems, with ways like the latest example last Thursday, the 27th September, where the government raised import duties on a number of products.
Surely, Emerging Markets are generally under pressure this year, but in India, the risk of a currency crisis is partly homemade. In March, the government approved a fiscal budget with an even bigger deficit than prior years and already now, after just six months, the price has to be paid.
Both countries will still be among the world champs in GDP growth, but less than expected. More people in China and India will benefit from the growth as it remains high, though India’s economy is facing increasing risks due to the external imbalances. In particular in the Chinese stock market, many negative factors are already priced-in, which speaks for a rebound, but during first quarter in 2019, the lower GDP growth could give some jitters.