President Donald Trump believes he and America have the upper hand in the on-going trade war with China. So far at least, the economic data and actions of both parties suggests that he might be right. While the U.S. has seen unemployment plummet and economic growth remain steady, China is being forced to pump money to prop up its slowing economy.
The Chinese central bank has announced that it is freeing up roughly $109 billion dollars for lending. In order to drum up the cash, the Chinese government is reducing the capital amounts banks must have in their reserves. This move is risky as banks with less capital on hand are more vulnerable to turbulence in financial markets. By cutting requirements, the Chinese government could be building a house of cards, one that could collapse when the next recession rolls around.
Yet the Chinese government is getting more desperate to prop up growth. Already, the Communist Party has boosted infrastructure spending, slashed taxes, and used other monetary measures to boost the economy. It hasn’t been enough. And while the Communist Party may seem to have a tight grip on China, the party relies on strong economic growth to ensure harmony and a compliant population.
The yuan continues to slip against the dollar. This could actually strengthen exports as it lowers costs to buy yuan denominated products in dollars. However, a weakening yuan will also increase import costs, including imports for needed components and parts in the manufacturing sector. All of these economic woes caused the Shanghai Index to plummet three percent on Monday.
So far, President Trump has shown no sign of caving. While the Chinese have reached out to the administration in an attempt to resolve the on-going trade dispute, Trump has been giving them the cold shoulder, claiming that it’s not yet the right time to deal. Most likely, Trump recognizes that if the United States continues to pressure China and cause their economy to slow down further, he’ll be in a better bargaining position.
Such a tactic isn’t without its risks, however. While the American economy is strong in many areas, key weaknesses remain. Household, credit card, and student loan debt all remain historically high. Wage growth is slow. Housing prices have become unaffordable in many areas.
If the American economy were to slow down, these issues —among others— could quickly create a cascade of bad developments. The United States may indeed take a hit. The IMF has projected that economic growth in 2019 could weigh in at only 2.5 percent, down from 2.9 percent. Globally, the IMF has reduced its outlook by .2 percent, down to 3.7 percent for 2019.
Still, for now the Chinese appear to be bearing the brunt of the trade war burden. Their long-surging economy has begun to slow in recent months. According to the IMF, China’s economic growth has slowed from an initially projected 6.6 percent to 6.2 percent and some analysts fear bubbles and other risks may be building as the government struggles to maintain growth. And if the trade war is to end any time soon, the Chinese may need to make some serious concessions.
