Essay Example on US Trade War: Chinese Economy at Risk?

Introduction

If the US trade tariffs to bite, then the economic troubles in China could even run more profound than it is now. There are already problems that Beijing is facing, and if the trade war comes into space, then such issues could worsen. Since the global financial crisis, today China faces the slowest growing economy; China is burdened down with debt, and besides, it is also facing issues about bubbling in the real estate industry, and moreover, its currency is also weakening. Such a combination is very lethal especially for a large economy like China whose impacts is felt all over the world. Regardless of the $200 billion that the Trump administration has imposed on the Chinese goods, there is still a growth in exports, and by October 2018, the exports were at 16% (Bollen & Rojas-Romagosa, 2018). However, according to Li, He and Lin (2018), there could be significant changes in the coming months if the US manages to raise the tariffs from 10% to 25% as it had earlier threatened, and this could add to the already growing problems that China has.

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Runaway debt

The time when the Chinese economy rapidly expanded is during the years after the global financial crisis and al this was due to the debt binges. Gerard Burg who is a senior economist at the National Australia Bank in Sydney states that the growth of China has been highly credit intensive. A portion of this money China has used to build roads, bridges, and other public infrastructure systems, with most of the money ending up in less productive sections of the economy like the companies run by the state which are described as big and inefficient. It is however sad that there have been no much benefits accrued to the more dynamic private sector.

In late 2018, there were attempts by Beijing to step up and rein in the high debt levels, which according to analysts is among the significant reasons as to why the Chinese economy is losing its momentum (Bollen & Rojas-Romagosa, 2018).

There are high levels of doubt by most of the financial analysts about the commitment by the Chinese government to clean up its financial systems considering the slowly deepening of its economy and the intensifying trade war between it and the US. According to Kevin Lai who is an economist at investment bank Daiwa Capital Markets, most of the state-run firms and provincial governments would struggle to avoid drowning without regular injections of cheap credit (Rosyadi & Widodo, 2018). There would be very negative impacts if China was to cut down their credit lines and such repercussions would include things such as employee layoffs, social unrest, and bankruptcies among many others. However, it is essential to note that this is a scenario that Beijing would not like to get into.

Plunging currency

There are also struggles by the Chinese government to fend off pressure which has dawned upon its currency (yuan) whose value has since January 2019 sunk more than 9% (Bollen & Rojas-Romagosa, 2018). The concerns about the rates hike by the US Federal Reserve, and the health of the Chinese economy has hurt the government. The investors guessed that the yuan would keep falling, and in 2015 and 2016, many investors flooded out vast sums of money out of China. As a result, Beijing had to prop up its currency, and it did this by spending hundreds of billions of dollars. According to Manu Bhaskaran, it could become a trend for the rapidly falling yuan, and there could be a considerable capital outflow which could feed on itself. In recent months, it seems like Beijing has started to dip into its massive foreign currencies war chest aimed at slowing down the declining Yuan.

Real estate bubble

The country's overheated property market is another sector presenting significant threats. In the past decade, there have been more than doubling in the prices, accompanied by a shortage of housing in major cities and low-interest rates. There now seems to be some cracks in the real estate market, and this can be seen in some instances where big property developers slash prices in the wake of falling demand. However, Yao stated that it would only be a matter of time before the cooling of the markets, something whose proof has not been provided to date. The Chinese economy has had one of its brightest spots being in the real estate industry, and if this industry lumps, then it would turn out to be a burden instead (Bollen & Rojas-Romagosa, 2018). The impact of this is that it would add another layer of pressure.

Chronic problems

As they seek to pop up growth, the Chinese government officials have turned to cut on their infrastructure spending, tax, and also implementing looser monetary policy. However, some analysts believe that these are wrong moves to be taken for the country's economic afflictions. The problems that China are facing are described as chronic and not acute. There is a huge ignorance of China's uncompetitive business environment and the aging population. The Chinese government has tried relaxing some of its outstanding long-term policies and also tied to increase its competition aimed at giving foreign companies greater access in industries such as automobiles and banking (Siddiqui, 2018). However, such moves are believed to have come too late or do not go far enough to solve the underlying problems, and as a result, have become serious concerns about China's long-term economic future.

The impacts of the financial crisis on China's Economic Performance

There are many indicators that reflects the effects of the financial crisis on China's economic performance and some of those indicators include the trade and the current account balances, the GDP, the rates of inflation, trade, unemployment rates, interest rates, measures of consumer confidence, tax revenues, housing prices, and the government expenditures.

Just at the beginning of the financial crisis, there was a fall in China's GDP growth rate, though the intensities could not match up the extent to which the falls were in other larger economies. In 2008 for instance, the quarterly growth was estimated to be at 10.6 percent, 10 percent, 9 percent, and 6.8 percent giving an average growth rate of 9.3 percent. In 2009, these percentages kept falling, and this was an indication of decreasing rates of GDP growth. The primary measure of inflation which is the consumer price index fell 1.2 percent every year (Bown, 2009).

China Is Already in Crisis

There is a worrying gaze by the world investors towards China, and this is for a good reason. In the third quarter, economic growth sank to 6.5 percent, and this is the slowest pace since the 2009global financial crisis depths. Last year, the purchases of cars fell for the first time in two decades (Bown, 2009). The warning by Apple Inc that its sales in China were sagging gave an alert to the world that corporate profits and the global growth would be dragged down by the slowing Middle Kingdom. However, this had already been figured by the locals several years ago. The Shanghai stock markets even after the recent uptick, has still jumped by over a quarter from the 2018 high (Rosyadi & Widodo, 2018). The outlooks are not any healthier. The Chinese factories have already started to feel the pinch from the tariffs imposed on its exports to the US by the US president Donald Trump (Bollen & Rojas-Romagosa, 2018). The high rate of the Chinese economy deceleration was evident in December 2018 by the abrupt and unexpected shifts in the imports. Beijing has, in turn, turned the volume down on its bravado and held a negotiation with Washington to have the conflict diffused. The investors may be smoothened if a trade pact happens, and in return, there could also be a juice economic growth which would at least be temporary. However, this would not bring to an end the woes that China is currently facing. Whereas the tariffs are great pain, the actual problem is embedded in China's financial structure, and it has run deeper (Rosyadi & Widodo, 2018).

However, what many people fail to recognize is that there is already a crisis in China. This is not the kind of collapse that the US faced in 2008 known as a hold-on-for-dear-life collapse or the ferocious, surprising Asian Tiger economies meltdowns that were experienced in 1997 (Woo, 2008). However, this is a complete crisis full of gutted banks, state bailouts, and bankrupt companies. Since the distinguishing of their model of state capitalism as socialism with the characteristics of the Chinese, the Chinese crisis can now be referred to as a financial crisis with the Chinese qualities.

The current slowdown in growth is not the major crisis facing China but has been instead going on for a while now, and from the predictions made by most of the economic analysis, it is not going away any soon. How the situation gets not solved or solved will be of significant impact on the economy. The China economic future is at the core of this crisis and whether or not China can manage the necessary structural transformations to have its economy propelled into the world's ranks (Handley & Limao, 2013). It will also determine if China will make it to the pillar of economic growth, or remain to be a threat to the stability of the world.

Relocation of production

Many western companies over the last decades have moved sections of their production entities to China. The primary reason for such moves was due to the comparatively lower costs of wages in China, which implied that on average, the cost of producing in their cities was higher than the cost of producing from China (Bown, 2009). However, there has been a rise in the wages especially in the lower coastal areas of China, and most of these companies are now considering moving their production units to other emerging economies such as Vietnam or Philippine. That is because these countries are described to be in their early economic development stages and could, therefore, be of benefit since they would offer lower wage advantage as compared to China (Bollen & Rojas-Romagosa, 2018). Such kinds of shifts are strategic stories referred to as medium term.

It is important to note that such reallocations are costly and time-consuming especially in cases where there is an involvement of fixed assets. The process of companies reallocations has seemed to accelerate as a result of the increased tension between China and the US. For instance, several studies are showing that more companies are considering to reallocate. Besides, the effect of the trade war between China and the US seems to lead to an increased foreign direct investment by other countries in the Southeast Asian Countries. There has been the implementation of a series of protectionist measures by the US that targets specific sectors like aluminum and steel since early 2018. It is important to note that China is the major exporter of the products mentioned earlier to the US (Handley & Limao, 2013). Whereas the trade tariffs imposed on China by the US initially had its target on a small proportion of the US trade and a limited number of products, there was a gradual increase in its coverage in terms of goods due to the intensifying trade conflict between China and the US. In the summer of 2018, as a consequence of China's decision to react to the US tariffs, the US decided to announce additional tariffs covering China's imports up to $200 billion (Bown, 2009). The implementation of such other tariffs measures took place in September 2018, and the US could be targeting China imports through such new tariffs increments. The US administration could also extend protectionist measures to auto parts and automobiles, leading to a raised risk in the geographical spread of the trade war since there could be retaliation by some of the affect...