Trade war has a negative impact on China

Chriss Street:

The biggest damage from a renewed trade war with the United States will be China's swing from 25 years as a net domestic saver to a global net borrower.

More than $1 trillion in stock value was wiped out on Monday due to the collapse of the expected U.S.-China trade deal.  The American government mostly ignored the 600-point drop in the Dow Jones Industrial Average and soybean futures hitting an 11-year low, but China's central bank was forced to inject $3.5 billion into the financial system after foreign investors dumped a record $1.6 billion's worth of mainland shares and its yuan currency fell to its lowest exchange rate to the dollar in four months.

U.S. stock markets on Tuesday recaptured half of Monday's plunge as new data showed that tariffs on China have resulted in deflationary import prices, and President Trump backed his base by granting farmers another $15 billion in aid to offset China tariff retaliation.

Standard economic analysis projects that the U.S. tariff increases from 10 percent to 25 percent on $200 billion of imported Chinese goods will shave just under 1 percentage point off China's growth rate, while the approximately 8-percent average tariff increase on $60 billion of U.S. exports to China will shave 0.3 percent off U.S. growth.

But according to Diana Choyleva of Enodo Economics, this analysis does not take into consideration any potential blowback as China's current account balance that peaked at 9.9 percent gross domestic product in 2007 shrank to 0.4 percent of GDP in 2018 and is set to plunge into the red this year for the first time since 1994.

China for decades has had the luxury of state-led recycling of its up to 51 percent of GDP domestic savings rate into subsidizing huge new export factories, construction of 64 million vacant apartments in ghost cities, and buying trillions of dollars in U.S. Treasury bonds to devalue the renminbi to maximize export competitiveness.

But the domestic savings rate for all three prongs of China's corporate, household and government sector are declining in parallel as President Xi Jinping has been attempting to rebalance the economy toward consumption and away from investment-led growth.

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How long can China sustain its ghost cities projects when its current accounts balance goes negative?  It becomes a landlord with not cash flow to sustain operations.  That China refuses to do a deal suggests how wed it is to its corrupt operations.