China’s economy has the sniffles—this is what might cause a full-blown cold

Kinda quiet.
Kinda quiet.
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As China and the US prepared for the start of two days of trade talks in Beijing today (Jan. 7), a White House adviser warned other US companies with sales in China could, like Apple, soon feel some pain. And that’s a good thing, according to Kevin Hassett, chair of the White House Council of Economic Advisers, because it shows that Donald Trump’s tariff war on China is working.

“There are a heck of a lot of US companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China,” Hassett told CNN after Apple last week revised its holiday quarter earnings guidance substantially, blaming a slowdown in China. “That puts a lot of pressure on China.”

Apple’s revision came after a slew of economic indicators showed that China’s economy experienced a substantial slowdown in 2018, particularly after the US imposed tariffs on $50 billion in Chinese goods in July, setting off tit-for-tat rounds of escalating duties. China’s quarterly GDP growth for July-September came in at 6.5%, the worst since the global recession, and last week two key gauges of manufacturing activity entered contraction territory.

Consumption, which China hopes will become the key driver of its growth, has also showed signs of sputtering—this week, the country is expected to post its first annual decline in car sales since 1990 (electric cars are doing well, but make up a small share of the market).

Closer to home than Apple, e-commerce giant Alibaba late last year revised its full-year earnings forecast downward (paywall), and while sales at its annual Nov. 11 online shopping gala topped that of 2017, sales growth fell to 27%, the lowest in the history of the decade-old event. Consumption, which made up three-quarters of GDP in 2017, is likely to account for a lot less in 2018 (paywall), the Wall Street Journal reported. The country has targeted growth of 6.5% for the year, and the official figures are due in two weeks.

US negotiators in Beijing, led by US deputy trade representative Jeffrey Gerrish, are hoping all of this gives them leverage in today’s talks, with aims including an overhaul by March from China in how it supports state businesses, and getting China to buy more American goods. The US might be pretty well placed going into these talks—in recent weeks China cut tariffs on US car imports and in a New Year’s Day speech, president Xi Jinping signaled to Trump that China was seeking “cooperation” and “consensus”—but that doesn’t mean Trump’s trade strategy should get the credit.

Economic analysts say slower credit growth (paywall) as a result of curbing risky lending practices, as well as efforts to change its economy from one that is export-led to one driven by services and domestic consumption, have more to do with it. China saw its slowest economic growth rate in a quarter century in 2015, far before Trump was elected, after all.

When it comes to the specific case of Apple, analysts say the iPhone maker was already experiencing problems because of competition from cheaper rivals such as Huawei, and because its big selling point elsewhere—the operating system and related universe of apps—doesn’t matter as much in China, where the most important app, WeChat, is hardware agnostic.

But even if the tariff war ends, there’s reason to believe that the economic doldrums are here to stay for China. Back in 2012, when China’s working-age population started shrinking—the overall population could start falling in just eight years—US economist Nicholas Eberstadt warned that China’s aging as a result of its one-child policy would have more significant consequences for its growth than people were realizing. Last week, US-based demographic expert Yi Fuxian warned that China’s age profiles are startlingly similar to Japan’s in the 1990s, shortly before two decades of economic malaise set in.

China has limited ability to fix its demographic problems, while financial caution is going to restrain the extent to which authorities can stimulate the economy. Something that looks like a concession to Trump to protect market access and take the pressure off of its biggest companies may well be one fix China is able—and keen—to do.

Kari Lindberg contributed reporting.