China’s Dilemma

It’s been almost two years in the making, but the U.S. and China finally agreed on at least part of a new trade deal, called Phase 1. But there might be less to the deal than meets the eye.

Phase 1 calls for a number of changes in how the Chinese deal with intellectual property and technology, and for China to increase purchases of U.S. agricultural products by $32 billion over two years. That’s more than the total amount of agricultural products that China bought from us in 2017, $24 billion, before all of this started. What will the Chinese do with all that extra stuff?

The same goes for pledges in the energy market and the services sector.

If the Chinese actually buy as much as they have pledged to purchase from the U.S., they’ll either need to reduce domestic supply, which seems unlikely, or buy our stuff at the expense of other foreign suppliers. One approach that seems wildly improbable is that China will grow fast enough to absorb the extra goods and services. The country is slowing down, which is probably why they signed the deal in the first place.

The Chinese economy is bumping along at the lowest GDP growth rate in three decades, hurt by the fading impact of heavy stimulus spending at the start of the 2010s, an attempt to reign in massive debt at the local level, the trade war with the U.S., and the general aging of its population.

The outlook has turned negative to the point where the government pumped more money into the financial system at the start of the year, and is restarting coal plants to support heavy industry.

In the first week of January, China reduced the reserve requirement for banks, which allows them to lend more of their deposits. The move freed up $115 billion in the financial system, but that doesn’t mean the money walks out the door and gets put to productive use. Chinese banks aren’t blind to the fact that the local economy is losing steam, so they choose to lend mostly to state-owned enterprises (SOEs), which are backed by the government.

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Gary Anderson 4 weeks ago Contributor's comment

China knows energy is critical to future growth. New coal plants are cleaner, but still not as clean as nat gas.

Katy Lin 4 weeks ago Member's comment

What about solar?

Gary Anderson 4 weeks ago Contributor's comment

The bedrock of China energy is coal.