China cannot carry Global Economy if U.S. stumbles

China cannot carry Global Economy if U.S. stumbles

Suddenly it’s a world upside down—investors are deserting U.S. growth plays as skepticism about Donald Trump’s agenda rises, while overcapacity-ridden China and aging Japan are looking unexpectedly strong

Better growth in the world’s second- and third-largest economies, which both posted surprisingly good manufacturing numbers Friday, is great news for Asia and commodity exporters.

It won’t do much to help major developed economies, however, if growth in America and Europe falters along with Mr. Trump’s pro-business agenda.

Better growth in China does contribute in one key way to the so-called Trump trade: It boosts global inflation through higher commodity prices. The close correlation between global commodities and Chinese real-estate investment shows the bulk of the big bounce in prices since early 2016 is due to the cyclical recovery in China, rather than the rhetoric around plans for increased U.S. infrastructure spending.

That means that a big part of the uptick in global inflation numbers—which central banks from Europe to the U.S. have worriedly noted has mostly been driven by fuel prices rather than rising wages—is about China as well.

Unfortunately that is the wrong sort of inflation: Rising commodity prices in consumer countries such as the U.S. and nations in Europe erodes purchasing power and ultimately means lower growth. Strong growth in Chinese construction, meanwhile, is an enormous help for Australian iron-ore exporters and copper miners in Chile, but it doesn’t do much for the U.S. or Europe—the likes of heavy equipment maker Caterpillar aside.

Faster growth in China and Japan will doubtlessly help certain firms and sectors on the margins—but these are still highly protected economies, unlike the U.S. and European powerhouses such as Germany and the U.K.

The primary effect of better growth in China’s “old” economy is still higher commodity-price driven inflation—reflation indeed, but not of the happy variety. With Mr. Trump’s agenda under assault and political uncertainty in Europe still rising, the West needs to look to itself to keep growth ratcheting higher.

An independent survey of 2000 Chinese companies released on March 30, 2017 by the Cheung Kong Graduate School of Business found that even as production has expanded, private investment remains sluggish and overcapacity is at a historical high despite an estimated 5.5 million industrial jobs lost last year.

Earnings in China’s industrial sector surged 31.5% in the January to February period from a year earlier, growing at a pace unseen in over seven years, according to official data.

That has extended a lifeline to state-owned firms, whose income rose 40.3% in the first two month of this year over the year-earlier period, especially in the oil and steel sectors. But economists say it is unlikely that Beijing will sharply increase infrastructure spending this year given its concern over financial stresses and rising debt in an important political year. That once-in-five-years Party Congress to appoint top leaders is likely to damp earnings, they added.

China’s total nonfinancial-sector debt was 277 % of GDP at the end of 2016, including corporate debt estimated at 164%, according to UBS Group AG.

www.wsj.com


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