The irony is striking. While Donald Trump and Joe Biden have been busy bashing Beijing in the run-up to the presidential election, the Chinese economy has seen a vigorous bounce back. In the midst of the coronavirus pandemic, China is emerging as the engine of global growth.
China is the only big economy expected to show a positive advance this year, with the IMF projecting growth of 1.9 per cent, followed by 8.2 per cent in 2021. Yet continuing trade friction between the world’s two largest economies means that the US will not benefit from this expansion as it did from China’s huge fiscal and monetary pump priming after the great financial crisis of 2007-08.
Chad Bown of the Washington-based Peterson Institute for International Economics points out that China’s imports from the US of goods covered by January’s trade deal have failed to catch up to pre-trade war levels, running 16 per cent lower than at the same point in 2017. In contrast, Chinese imports of similar goods from the rest of the world are 20 per cent higher over the same period.
At the same time, Mr Bown says, China’s commitment to buy an additional $200bn of American-made goods and services under president Trump’s self-proclaimed “historic” deal is falling well short, reaching only 53 per cent of the expected purchase target at the end of September.
Perhaps the most telling verdict on the trade war for this president who regards the stock market as the ultimate judge of his performance comes from a study by economists at the New York Federal Reserve and Columbia University. They estimate that the trade war lowered the market capitalisation of US listed companies by $1.7tn, equivalent to a 6 per cent fall in the value of the S&P 500 constituents. That reflects how new tariff announcements reduced profit expectations at exposed firms. The study found no beneficial effects for firms receiving tariff protection.
The reality is that Chinese retaliation has wreaked havoc with US exports. As Ryan Hass and Abraham Denmark note in a paper for the Brookings Institution, US tariffs forced American companies to accept lower profit margins, cut wages and jobs for US workers and raise prices for American consumers. While the bilateral trade deficit with China has shrunk, they add, the overall trade deficit has not come down because US tariffs on China diverted trade flows, causing US deficits with Europe, Mexico, Japan, South Korea and Taiwan to increase as a result.
If the performance of US equities has been remarkable despite trade wars and the pandemic, it is down to ultra loose policy and high performing Big Tech, not mainstream business. Note, too, that tariffs have not delivered much revenue to the US Treasury because the government has had to distribute most of the money in subsidies to placate angry farmers over lost exports to China.
The paradox in all this is that friction is largely absent in US-China financial relations, the only area in which market access for US business has improved. With the Beijing leadership pursuing incremental liberalisation, US banks are now starting to take controlling stakes in existing partnerships. At the same time China is attracting increasing amounts of developed world portfolio capital. As index providers incorporate more of China’s equities and bonds into their indices, passive funds in the US and elsewhere will expand this flow.
Have the US and China passed the point of no return?
Interesting, here, is that the Chinese government bond market, the second largest in the world, offers positive real interest income after allowing for inflation, which is no longer the case with US Treasuries or big European bond markets. At the same time the Chinese equity market is the only one outside the US to offer serious exposure to Big Tech.
It follows that China offers hard pressed US and other developed world pension funds real incomes from which to pay retirement obligations, subject to currency and regulatory risk. While China outgrows the US, and the US pursues ultra loose monetary and even more expansionary fiscal policy, an enduringly weak renminbi scarcely seems unduly threatening.
As for regulatory risk, there are historic grounds for worrying about arbitrary intervention by the Chinese authorities. The prize of more secure pension incomes for the elderly courtesy of China ought to be an incentive for Western policymakers to foster a stable and peaceful financial interdependence. Under a new Trump administration that will not happen. Whether, against the background of aggressive US-China strategic competition, Joe Biden might choose such an option is moot.