China’s not so happy 70th birthday

The 70th anniversary of the People’s Republic of China came against the difficult backdrop of the trade war protests in Hong Kong, swine fever and a struggling economy.

Policy tools are being tweaked continuously and the net result is that, so far, the economy as a whole continues to hang together. This is taking a lot of effort though and has brought the currency into play as a prominent, if not a very effective new policy lever.

Given the energy-sapping influence of the trade war and the political irritation of the Hong Kong protests, the very last thing that China needs right now is a food safety shock. But the swine fever is rampaging, not just through China, but across the region leading to the decimation of swine herds and soaring pork prices.

Overall food price inflation has already soared to more than 12% as a result. And this is effectively a tax on households, weighing on their ability and inclination to spend.

This would be bad enough in normal times. But right now, with authorities in China on a “war-footing” to prevent the trade war from derailing the economy – it is even more concerning.

Fiscal tools have already been activated, including tax cuts and subsidies, as well as infrastructure spending financed by local government bond issuance. Monetary policy levers have also been added and incremental nudges to policy accommodation are ongoing, as we saw this month with the further downward push to the loan prime rate by 5 basis points, and cuts to required reserve ratios.

All this may help in time, though lags make it hard to judge the efficacy of measures already undertaken. In the meantime, the run of data has been mixed to poor. Hard data – fixed asset investment, industrial profits and industrial production have come in substantially weaker than expectations recently. Softer survey data, PMIs, and others have been more mixed with some recent upside surprises. The net conclusion, though, remains that the trade war is hurting China’s economy, and it is taking a substantial policy effort to keep things moving forward.

Additional policy efforts look pretty much like a done deal. China’s strategic pork reserves have been utilised to try to keep food prices down. But further direct support measures for households will likely become necessary. Additional purchases of US pork will also likely be necessary, weakening the Chinese position in the trade war, though this can be presented as a favourable shift to foster trade dialogue, as it has been recently.