HONG KONG (Reuters Breakingviews) - The markets just delivered a stinging reminder about Chinese consumption. Fresh threats by President Donald Trump to apply tariffs on another $200 billion of goods from the People’s Republic sent mainland stocks reeling on Tuesday. They are now trading at their lowest in a year. Bond prices also fell and the yuan posted its sharpest single-day decline against the dollar since January 2017. Local demand has not yet decoupled from global trade.
Contemporaneous moves by the People’s Bank of China, which included a massive cash injection into money markets and a verbal promise to release more bank reserves, shows how serious the issue is. Fixed-income was already under pressure due to a regulatory crackdown on sloppy lending, but shares had been moving up nicely.
That reflected a steady thematic refocus on local shoppers. A Morgan Stanley analysis found that only 12 percent of revenue at companies listed in China derived from shipping goods overseas. A rallying yuan also was reducing the cost of imported components and commodities, benefiting companies and consumers alike.
Reduced exports to the United States will take their toll, though. They contributed 9 percent to last year’s economic growth and fund the paychecks for millions of workers. As importantly, while China runs a large net surplus, it also buys a lot of foreign wares. OECD data shows the country imports about 10 percent of the world’s goods and services, especially energy.
Many companies also have borrowed heavily in dollars. A rally in the greenback, combined with signs of softening investment and rising bond defaults, arrives at a bad time. The companies currently pulling down Chinese indexes include heavyweight airlines such as Air China and commodities producers including Tianqi Lithium. The tech-heavy Chinext Growth Index, dependent on imported chips and the like, also fell.
One immediate result is de facto easing. In a break from norms, the central bank has refrained from following the U.S. Federal Reserve’s latest rate hikes. That will keep the yuan soft, which might offset some impact of trade tariffs, but will further irritate Trump. Chinese companies are far less dependent on exports than they used to be, but the economy is hardly insulated from the forces of isolation.
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