It’s been almost two years in the making, but the U.S. and China finally agreed on at least part of a new trade deal, called Phase 1. But there might be less to the deal than meets the eye.
Phase 1 calls for a number of changes in how the Chinese deal with intellectual property and technology, and for China to increase purchases of U.S. agricultural products by $32 billion over two years. That’s more than the total amount of agricultural products that China bought from us in 2017, $24 billion, before all of this started. What will the Chinese do with all that extra stuff?
The same goes for pledges in the energy market and the services sector.
If the Chinese actually buy as much as they have pledged to purchase from the U.S., they’ll either need to reduce domestic supply, which seems unlikely, or buy our stuff at the expense of other foreign suppliers. One approach that seems wildly improbable is that China will grow fast enough to absorb the extra goods and services. The country is slowing down, which is probably why they signed the deal in the first place.
The Chinese economy is bumping along at the lowest GDP growth rate in three decades, hurt by the fading impact of heavy stimulus spending at the start of the 2010s, an attempt to reign in massive debt at the local level, the trade war with the U.S., and the general aging of its population.
The outlook has turned negative to the point where the government pumped more money into the financial system at the start of the year, and is restarting coal plants to support heavy industry.
In the first week of January, China reduced the reserve requirement for banks, which allows them to lend more of their deposits. The move freed up $115 billion in the financial system, but that doesn’t mean the money walks out the door and gets put to productive use. Chinese banks aren’t blind to the fact that the local economy is losing steam, so they choose to lend mostly to state-owned enterprises (SOEs), which are backed by the government.
Traditionally, SOEs pursue goals other than profit, such as full employment, which makes them popular with provincial governments but not very likely to run efficiently or turn a profit. That’s fine with banks because the SOEs carry the imprimatur of the state, so the lender knows he’ll get his money back.
On the industrial front, China signed up to the Paris Agreement and pledged to cut carbon emissions. The country reduced its dependence on coal from 2014 through 2016, but then increased its coal consumption from 2017 on. Now the country is building or restarting a massive number of coal-fired energy plants.
According to the Financial Times:
“China is set to add new coal-fired power plants equivalent to the European Union’s entire capacity in a bid to boost its slowing economy, despite global pressure on the world’s biggest energy consumer to rein in carbon emissions.”
The Global Energy Monitor estimates that China is adding 148 gigawatts of coal-fired energy capacity, which is almost exactly the same amount of coal-fired capacity in all of Europe, 149 gigawatts. While this might sound like bad news for anyone worried about the climate, there’s a strange silver lining to the cloud. China doesn’t need the electricity, so it’s likely the plants won’t operate at capacity.
Chinese electrical use expanded by 8.5% last year, but the electrical grid remains oversupplied. Local Chinese governments, typically through SOEs, don’t build coal plants just to sell electricity; they also
build them to ramp up local employment during the construction phase as well as during operation. So yes, China is using more coal and will probably increase its use in the future, but not by as much as it would seem.
The bigger picture is that China is doing many things to stimulate growth in the face of what looks to be a long-term slowdown. It’s still a command economy, so Chinese officials have more options at their disposal than authorities in other countries to try to turn the tide.
But that doesn’t mean they’ll be successful. It looks like they’re headed for a tough time.
The only question is, will they muddle through with a soft patch of low growth, or will it be an ugly economic shock to the system?
There’s no way to know for sure, but I’m keeping a close watch on companies with a lot of exposure to the Middle Kingdom, which could take a hit if things get ugly.
- World War 3: The Stage Is Being Set For The United States To Go To War With China And Russia Simultaneously
- China Responds to Joe Biden’s Declaration of War
- The Apocalyptic Global Food Crisis That We Were Told To Prepare For Has Already Started In 2022
- Reporters Are Being Detained At Davos! +Secret Leaked Document
- Check out the parking lot at the Davos Climate Change Conference this year…
- First Black Lesbian Press Secretary Immediately Demoted After First Week
- The Level Of Evil In Our Society Is Off The Charts
- Brooklyn Half Marathon Leaves 1 Dead, 15 Hospitalized
- Irish President Says Elon Musk is a Dictator Because He Wants to Give People Too Much Freedom
- When the crowd gets trapped in the casino with no way out, we’ll probably realize I’m too bullish…. The run to cash has officially begun.