Trump brought knives, but China brought a bazooka

The real estate sector continues to shrink, with a 13.9 percent decrease in real estate investment compared to the same period last year.

New home prices fell 0.4 percent from August, and secondary market homes fell 0.6 percent. New home prices are now more than 10 percent off their peak, while “used” homes are down almost 20 percent. Prices are now back to where they were before the pandemic and before Xi introduced the “three red lines” policy that sent the market skyrocketing.

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September was the worst month of the year for the real estate market; This will cause concerns in the general assembly as it is a key factor behind the weak consumer confidence and spending levels that have led to deflation over the last two and a half years.

Nominal GDP growth of 3.7 percent highlights how significant the rate of deflation has become and how threatening it is to any recovery in domestic confidence and consumption. At the heart of the weaknesses in the domestic economy is the ongoing collapse of the real estate sector, which Beijing has failed to stop.

The results from the plenary will be watched closely to see whether the party leadership plans to do anything more significant to boost domestic consumption than the piecemeal and relatively ineffective measures it has tried so far.

The strongest growth areas in the Chinese economy, as expected, were those targeted (and subsidized) by the last five-year plan: electric vehicles, computers, communications and other electronic equipment manufacturing, ships and aircraft.

The 16 percent annual growth in the automobile sector’s added value reveals both the unbalanced nature of the economy and the structural imbalances within it.

Although few of China’s automakers turn a profit, they are producing a wave of vehicles that are flowing to export markets where there are better margins due to weak domestic demand and endless cycles of price wars in the domestic market.

This is creating tension and setbacks in these markets as other countries move to protect their auto industries from China’s cheap electric vehicle exports.

The auto industry is one of the sectors Beijing has targeted in its campaign against “revolution,” or overcapacity and cut-throat competition that has helped fuel deflation.

The sub-economic structure of these exports and exports of other manufactured products are also negatively affected by this situation, as it is revealed in trade data that the increase in China’s export volume significantly outpaces the increase in their value.

Other sectors earmarked for consolidation include China’s coal and steel industries, which produced less last month as demand weakened and companies began to act in line with Beijing’s demand to reduce overcapacity. Coal production fell by 1.8% and steel production by 4.6% on an annual basis; This is not good news for Australia’s iron ore miners.

Increasing dependence on exports for growth makes China vulnerable. He has largely shrugged off the direct effects of Trump’s trade wars, but growing resistance to his exports elsewhere poses a threat to his mercantilist strategy.

There is a need for a better balance between domestic activity and foreign trade, which is something the leadership is undoubtedly grappling with ahead of the general assembly; but Xi is expected to double down on his long-term goal of achieving global dominance in advanced manufacturing as well as self-sufficiency in targeted sectors and their supply chains.

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The plenum is not expected to set GDP growth targets for the next five years – the last one was not – but China only needs growth of around 4.5 per cent in the December quarter to hit the “around 5 per cent” target with which it started this year.

or about 4.7 percent a year over the next five years to meet the target set by Xi as part of his “Made in China 2025” strategy, a plan to double the size of the economy by 2035 that gives China global leadership in electric vehicles, solar cells and shipping, and sees dramatic increases in the development of artificial intelligence, semiconductors, the domestic aerospace industry, biotechnology and other strategic sectors. It needs a growth rate of 4.8 percent. Based on its size in 2020, when the strategy was developed.

Although the United States is a market that currently represents only 10 percent of China’s exports, Trump’s trade wars could complicate China’s ability to achieve that goal.

China has developed in a free trade environment, but Trump’s tariffs on everyone are forcing other economies to become more defensive and protectionist. This increases China’s need to rebalance the relationship between domestic consumption and exports.

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Trump and Xi are expected to meet on October 31; Trump identified rare earths, fentanyl and soybeans as his priorities.

Tensions over China’s dominance over rare earths flared after China tightened and expanded its own export restrictions on rare earths and permanent magnets, which are essential for the most advanced manufacturers and critical to many military technologies, in response to China tightening restrictions on the sale of advanced semiconductors to Chinese companies. Trump then threatened to impose a 100 percent tariff on all imports from China.

Although Trump struck a deal with Anthony Albanese on Monday to gain access to Australia’s abundant rare earth reserves, it will take many years for the United States to break free from its dependence on China’s rare earths and rare earth magnets and the vulnerability they create.

Trump brought knives (his tariffs and access to the US market) to the trade conflict with China. Xi brought out a bazooka and made clear that he, not Trump, was the trump card in the next trade talks.

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