US to blame as recession risk looms
▶ China takes measures to cushion downward pressure
“The escalating trade war has led to financial market volatility and has constrained investments.” Wang Xiaosong
Economics professor at Renmin University of China
Warning signs of a looming recession in the US and other major economies continue to intensify, spooking investors into a widespread stock selloff in search of safe haven assets. There is one country to blame for what could be yet another disastrous economic crisis: the US, according to analysts.
For China, a potential global recession could add more pressure to the country’s already-slowing economy, but policymakers in Beijing have already prepared an array of measures from deepening reforms to adjusting monetary and fiscal policies to ensure stable growth ahead of a critical time as the country celebrates its 70th birthday.
Looming recession
The first warning sign for economic recession came from what’s known as an inverted yield curve for US government bonds. For the first time since 2007, which was even before the global financial crisis in 2008, the yields on short-term US Treasury debts exceeded those of long-term ones, a sign of shrinking investor confidences in the short-term prospects of the US economy.
Further, Germany’s economy contracted 0.1 percent in the second quarter of 2019, down from a 0.4 percent expansion in the previous quarter. Europe’s largest economy is just another contraction away from officially entering a recession. The UK’s economy, the second-largest in Europe, shrank 0.2 percent in the second quarter, marking the first fall in GDP in more than six years.
These numbers led to a major rout on Wall Street. On Wednesday, the Dow Jones Industrial Average lost 3.05 percent, the worst drop of the year, while the tech-heavy NASDAQ index fell 3.02 percent and the S&P 500 dropped 2.93 percent. Stocks in Europe also tumbled.
Many analysts have blamed the looming recession on protectionist trade policies from the US led by President Donald Trump, who has launched trade wars with almost all major economies, though the most costly one is with China. Many have started calling it the “Trump recession.”
“The escalating trade war has led to financial market volatility and has constrained investments,” Wang Xiaosong, an economics professor at the Renmin University of China in Beijing, told the Global Times on Thursday. Wang said that things could get worse for the US economy, if Trump follows through with his decision to impose a 10 percent tariff on $300 billion worth of Chinese goods.
In another blow to the US economy, China on Thursday said that it had no option but take “necessary countermeasures” against the US decision, though it did not provide further details about the potential measures.
China prepared
Though these troubling developments have not been felt in China so far, a potential recession in major economies will add to the slowdown pressure for the Chinese economy, with areas such as foreign trade likely to take further hit, analysts said.
In a rather comforting sign, the Chinese stock market on Thursday shrugged off the negative impact of the stock routs in the US and Europe, with the benchmark Shanghai Composite Index gaining 0.25 percent and the smaller Shenzhen Component Index edging up 0.48 percent.
Fresh economic data showed that the Chinese economy remained in what officials call a “reasonable range.” In July, although growth in industrial profits and retail sales slowed slightly, export growth picked up 2.6 percentage points to 5.7 percent, according to the National Bureau of Statistics (NBS). The job market, services sector and fixed-asset investment also remained relatively stable in the month.
However, top Chinese officials have also acknowledged potential risks for the economy. At a meeting on July 30 about economic work in the second half of 2019, top leaders said that the Chinese economy faces “new risks and increasing downward pressure” and called for “holistic efforts” to maintain stable growth, according to Xinhua.
The efforts include measures to support private enterprises, carrying out structural reforms and further opening-up, and pursuing proactive fiscal and prudent monetary policy, Xinhua reported. This more balanced approach is vastly different from the 4 trillion yuan ($590 billion) stimulus packaged used to cope with the global financial crisis in 2008.
“China has the ability to counter risks and keep economic growth relatively stable and above 6 percent,” Chen Wenling, chief economist with the China Center for International Economic Exchanges, told the Global Times on Thursday. Chen said that the most important thing for China is to manage expectations and improve confidence, especially in the financial market.
China vowed on Thursday to take necessary countermeasures against a US decision to impose 10 percent tariffs on $300 billion worth of Chinese goods starting on September 1.
The US decision has severely deviated from the consensus reached by the top leaders of the two countries during the G20 Summit in June as well as the right path of solving differences, the Customs Tariff Commission of the State Council, China’s cabinet, said in a statement on Thursday.
China is forced to take necessary countermeasures, said the commission.
The US Trade Representative’s office announced on Tuesday that it is delaying planned duties on a range of popular consumer goods including cell phones and laptops to December 15, while retaining the 10 percent additional tariffs on certain Chinese products starting on September 1.
US President Donald Trump said on August 1 that he would impose a 10 percent tariff on $300 billion of Chinese goods.
“Based on the experience of tit-for-tat rounds, the timing of China’s announcement is within expectations as the US government is good at going back on its word,” said Song Guoyou, director of Fudan University’s Center for Economic Diplomacy.
“Despite the timing, China is sticking firmly to its consistent stance toward the US’ maximum pressure by fighting back,” Song told the Global Times on Thursday. Reciprocal tariffs on US exports to China as well as halting of US farmproduct imports are likely to be among the countermeasures, said Song.
An insider close to China’s Ministry of Commerce (MOFCOM), who spoke on condition of anonymity, told the Global Times on Thursday that specific measures will be rolled out after the US tariffs start at the beginning of September.
“China firmly defends its own interests and will not bargain with the country’s core interests,” Liu Jianying, an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation of MOFCOM, said.
The imposition of tariffs is not the solution to the trade problem, but China has to take necessary countermeasures responding to the US move to tear up the agreement. China is confident and has the ability to weather the storm, Liu told the Global Times.
The tariff war is harmful to both China and the US. The two sides should resolve differences through consultation on the basis of mutual respect and on an equal footing, said Liu.
“Bilateral trade talks scheduled to be held in September might be affected if the two sides cannot fix the current situation in the next two weeks,” Song said.