On June 20th, the DOW fell by 297 points, with concerns regarding the Chinese trade war intensifying.
Chinese investment in the United States has decreased by 92% in 2018, and it appears as though rising tensions between the two countries have only just begun. Both the United States and China may feel some impact from this trade war, though it remains to be seen which country will be hit the hardest.
Between January and May, Chinese investment in the United States totaled $1.8 billion — signifying a drop of 92% compared to the same time last year. This is the lowest Chinese investment has been within the past seven years; prior to this, Chinese investment in the United States had been growing.
Trade tariffs have been flying back and forth between the United States, with the US placing tariffs on Chinese steel and aluminum, and hinting at additional tariffs on billions of dollars of goods. It has also become more difficult for Chinese investors to invest in the United States, due to additional regulations. All of this has resulted in an environment in which China is no longer comfortable investing in the United States.
Of course, foreign investment in the United States had also gone up dramatically in 2016 and 2017. From the first half of 2015 to the last half of 2016, Chinese foreign investment went up from $6.8 billion to $26.7 billion. For a time, conditions appeared to be extremely favorable for Chinese investment, especially as regulations were getting loser rather than stricter.
Even apart from the current trade war between China and the United States, there are some concerns that China’s economy may be slowing. The country’s growth has already slowed somewhat, which is likely to have an impact on the United States and Europe. With additional trade tariffs, this could be even more dramatic.
In recent years, China has been taking additional measures to regulate its own manufacturing industry, pulling back on more harmful methods and attempting to reduce the amount of waste coming in through its borders. This is a long-term strategy that is designed to improve the overall health of China, but may also have the side effect of slowing its economy.
Last year, China’s economy was able to grow 6.9% — but many analysts believed that it would slow down, due to declines in investments and customer spending. Though the Chinese economy will likely continue to grow throughout 2018 — the government currently has a growth target of 6.5% — it may not be able to keep these rate sup for much longer. Further, some believe that the data itself may be incorrect; some analysts have wondered if the official Chinese GDP data is being reported accurately.
US trade tariffs are estimated to impact Chinese growth by as much as 0.5%, depending on how strict these tariffs are and if the trade war continues to worsen. However, this isn’t the only problem for the Chinese economy. Chinese debt has also increased, with debt now at 2.5 times the value of the economy as a whole. China’s financial system has embarked on a large deal of risk, which now has to be mitigated. It is a concern that if the economy begins to suffer now, China may continue to engage in risky lending; though it is a risk, it also does stimulate the economy.
The coming months will give more information about the state of the Chinese economy. As it stands, it appears that the Chinese economy is due for a slow down regardless of the US-China trade war, and that China is likely to continue to pull back on its spending in the US. Growing animosity is making it difficult for both countries to move forward side-by-side, as are conflicting internal goals and policies.
Regards,
Ethan Warrick
Editor
Wealth Authority
