China growth pings, A US tariff playbook?

Perhaps unexpectedly, China's economic growth has been resilient during a trade truce with the US by dint of diversifying exports to new markets, and through a policy-induced prop to consumption. According to National Bureau of Statistics on Tuesday, China's GDP expanded by 5.2% in Q2, making it on track to meet its overall annual 5% growth target if it manages to counteract tariff headwinds and remains committed to ongoing stimulus.

Industrial output has surprised on the upside, and consumption came in weaker than anticipated. Pushing the same buttons may yield diminishing returns because of the degree of automation of Chinese factories. Policy will, instead, have to be directed at the property market, which continues on a downward spiral.

Tightly directed policy support provides Beijing headroom to deal with Washington's tariffs after their truce ends next month. There is a degree of frontloaded Chinese industrial output as the tariff developments unfold. If policymakers turn cautious about further easing, they risk exposing the Chinese economy to unusual external and internal pressure.

Temptation to keep the economy ticking over through directed stimuli can be strong. But it avoids addressing imbalances that have brought China into economic confrontation with the US. China must increase share of consumption to rebalance trade with the US. The Trump regime's pushback will have a domino effect on how other countries approach their own trade with China.

Tariff negotiations will, thus, proceed with a clearer understanding of the extent of US pressure and China's ability to repel it. China is forecast to see its midterm growth slide, unless it eases up on external trade and doubles down on internal consumption.

Any deviation from this premise will delay, but not avert, Chinese deflation, effects of which will be felt globally given the size of China's trade surplus. The US being a more mature economy can't aspire to China's current rate of growth. And incremental US growth that Trump is pushing for, is expected in isolation.