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China's exports growth holds firm despite trade tensions

China's exports growth holds firm despite trade tensions

China's exports growth held firm in July despite the mounting pressure from tit-for-tat trade tariffs, but the long-term outlook is decidedly cloudier.

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By Noah L. Wilson 08.08.2018

China’s exports growth held firm in July despite the mounting pressure from tit-for-tat trade tariffs, but the long-term outlook is decidedly cloudier as the long-running conflict continues to rattle financial markets.
It appears to be business as usual for now, as economists have revealed that the first round of US tariffs on Chinese exports worth $34bn have not had much of an impact. It has been more than a month since the tariffs arrived, and both sides show no signs of backing down as threats and countermeasures dominate trade policy.
Last Friday, China upped the ante after outlining tariffs on US products worth $60bn. This followed proposals by the Trump administration stating that a higher 25% tariff, rather than the previously mooted 10% levy, could be introduced on $200bn worth of imports from China.
As the two countries continue to exchange blows, there are fears that China’s exports could feel the brunt force. This has not come to pass yet, as economists expect shipments to have increased by 10% year-over-year in July. While this is slightly down on the 11.2% growth figure recorded in June, it suggests that all is well for now and that a sharp retreat is unlikely.
However, economists do expect the mounting headwinds to have a degree of impact further down the line, especially as China’s export sector is so large. “In addition to the tariffs impact, there might be some impact from front-loading of orders in previous months,” Betty Wang, ANZ Senior China Economist in Hong Kong, said.
She added: “There will be some gradual impacts that could be seen over the following months, as this is the first month the tariffs were implemented.”
While Beijing has had to react to protect self-interests during the last few weeks, investment research company TS Lombard has claimed that domestic issues are more of a pressing concern. While a full-scale trade war could be in the offing, the London-based consultancy said last week that China will place a greater focus on stabilizing the economy and ensuring that power structures remain in place.
“For the Chinese leadership, stabilizing the domestic economy, pursuing the 'Made in China 2025' modernization program, defending the power structure constructed by [Chinese President] Xi Jinping and pursuing the global ambitions set out by the Communist Party take precedence over the trade war with the US," TS Lombard China Research Chairman Jonathan Fenby said.
While the US and China both appear to be pursuing a degree of brinkmanship in the ongoing trade dispute, analysts believe that China will have more room to pursue hardline policies, as it is not constrained by political pressures domestically. This is not the case for the Trump administration.
The expectation that Beijing will not back down also reflects in the nature of its leadership, which relies on a strong power structure. Fenby believes that this makes it more essential that China does not bow to US demands to reduce state involvement, as “defending the Party State” is of great importance to Xi.
TS Lombard is also bullish on the trade war’s impact on China, saying that it will be “manageable” and that growth was already showing signs of tracking lower before the tensions surfaced. It added: “However, given the prospect that the trade conflict will drag out into next year owing to new tariffs and retaliations, policy will undoubtedly remain fluid."
The company expects China to record growth of 6.3% during the final six months of the year for a 6.5% average for the full calendar year.

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