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Forget the trade war, China's economy has other big problems

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Beijing is already wrestling with other problems that the trade war could exacerbate. China’s economy is now growing at its slowest pace since the global financial crisis. It’s laden down with debt and facing concerns about a real estate bubble and weakening currency.
Despite the Trump administration’s new tariffs on $200 billion of Chinese goods, exports are still growing strongly, up 16% in October. But that could change in the coming months if tariffs rise to 25% from 10% at the end of December, as the US has threatened, adding to China’s growing list of problems.

Runaway debt

The Chinese economy expanded rapidly in the years after the global financial crisis thanks to repeated debt binges.
“China’s growth has been highly credit intensive,” said Gerard Burg, Sydney-based senior economist at National Australia Bank. The total amount of debt in the Chinese financial system is now several times the size of the entire economy.
Some of this money has gone into building bridges, road and other infrastructure. But a lot has ended up in less productive parts of the economy, such as big, inefficient state-run companies. The more dynamic private sector hasn’t benefited as much.
Late last year, Beijing stepped up its efforts to rein in the high levels of debt, which is one of the main reasons the economy is now losing momentum.
China's economy is growing at its slowest pace since the financial crisisChina's economy is growing at its slowest pace since the financial crisis
Some analysts are skeptical about the Chinese government’s commitment to cleaning up its financial system, especially as the slowdown deepens and the trade war intensifies.
Many provincial governments and state-run firms would struggle to stay above water without regular injections of cheap credit, according to Kevin Lai, an economist at investment bank Daiwa Capital Markets.
Cutting off their credit lines “would have very negative repercussions, like social unrest, layoffs and bankruptcies,” Lai said. That’s a scenario Beijing wants to avoid.

Plunging currency

The government is also trying to fend off pressure on China’s yuan, which has sunk more than 9% against the dollar since January. It’s been hurt by concerns about the health of the Chinese economy and rate hikes by the US Federal Reserve that have pushed up the greenback.
The weaker yuan has boosted China’s huge export industry, as it makes Chinese products cheaper on global markets. But slumps in the yuan have caused headaches in the past.
Amid sharp declines in 2015 and 2016, vast sums of money flooded out of China as investors bet the yuan would keep falling. The crisis forced Beijing to spend hundreds of billions of dollars to prop up its currency.
The yuan has sunk more than 9% against the dollar since January.The yuan has sunk more than 9% against the dollar since January.
A rapidly falling yuan could become a vicious cycle, according to Manu Bhaskaran, the founder of Singapore-based research firm Centennial Asia.
“There could be a huge capital outflow and that could feed on itself,” he said.
Beijing appears to have again started dipping into its massive war chest of foreign currencies in recent months to slow the yuan’s declines, according to research firm Capital Economics.

Real estate bubble

Another threat lurks in the country’s overheated property market.
Prices have more than doubled in the past decade, according to research firm Gavekal, stoked by low interest rates and a shortage of housing in major cities.
But the real estate market now “appears to be showing some cracks,” said Aidan Yao, a senior emerging markets economist at AXA Investment Managers. He pointed to some instances of big property developers slashing prices in the face of weakening demand.
Chinese officials have struggled to rein in skyrocketing prices in cities like Beijing.Chinese officials have struggled to rein in skyrocketing prices in cities like Beijing.
“It is only a matter of time before the market cools,” Yao added.
The real estate industry has been one of the few bright spots for China’s economy this year but turn into a burden if it slumps, according to analysts at research firm Fitch Solutions.
“This will add another layer of pressure,” they wrote in a note to clients last month.

Chronic problems

Chinese officials have turned to tax cuts, infrastructure spending and looser monetary policy as they seek to prop up growth. But some experts think these are the wrong prescriptions for the country’s economic woes.
How the trade war could make China even stronger How the trade war could make China even stronger
“China’s problems are chronic, not acute,” said Derek Scissors, a China expert at the American Enterprise Institute, a Washington-based think tank.
In his view, the major issues, such as China’s rapidly aging population and uncompetitive business environment, are being largely ignored.
The Chinese government has relaxed its decades-old one-child policy and tried to increase competition with plans to give foreign companies greater access in areas like banking and automobiles.
But those moves have come too late or don’t go far enough, raising serious concerns about China’s long-term economic future, according to Scissors.
“Old, indebted economies don’t grow,” he said

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Eurozone economy grows by 0.2pc in third quarter – half the pace of the second quarter

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Ireland led the pack with industrial output rising a whopping 12.9pc Stock photo

Data from the EU’s statistical office showed that the eurozone’s economy grew by 0.2pc in the third quarter, half the pace of the second quarter.

Meanwhile, economic activity in Germany, which accounts for more than fifth of the EU’s output, dropped by 0.2pc.

Capital Economics said in a report on the numbers that it seemed likely that the disruption stemmed from emissions testing on new car production.

The new EU car tests became mandatory for all new models on September 1 and were introduced in the wake of an emissions cheating scandal.

Growth numbers were also dragged down by Italy whose economy flatlined in the quarter. There was no new third quarter figure given for Ireland which grew 2.5pc in the second quarter of the year, by far the fastest pace in the euro area.

In September, seasonally adjusted industrial production fell by 0.3pc in the euro area – a slowdown from 1.1pc growth in August.

Ireland once again led the pack with industrial output rising a whopping 12.9pc from a year earlier.

This year will mark the fifth consecutive year of eurozone growth although the numbers have started to soften since the summer.

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Japan, German Contractions Open Cracks in Global Economy

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  1. Japan, German Contractions Open Cracks in Global Economy  Bloomberg
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Japan's economy shrank in July-September as trade falls

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TOKYO — The Japanese economy shrank at an annualized rate of 1.2 per cent in July-September, as consumer spending, investment and exports fell, according to government data released Wednesday.

Cabinet Office preliminary data showed seasonally adjusted gross domestic product — the total value of a nation’s goods and services — dipped 0.3 per cent in the third quarter from the previous quarter.

Dragging on growth for the world’s third-largest economy was diminished trade, with exports falling 1.8 per cent and imports dropping 1.4 per cent, the data show. Consumer spending and company investments were also down.

The economy grew for the previous April-June quarter, but contracted the quarter before that. That contraction, in the first quarter, ended the longest straight period of expansion for Japan in nearly three decades.

Harumi Taguchi, chief economist at HIS Markit in Tokyo, said natural disasters during the third quarter had weighed on consumer travel and spending, which meant growth could recover if such disasters don’t happen during the year’s final quarter.

The closure of a major airport in the western Kansai area after a typhoon was one of the natural disasters that brought down growth, he said. A major earthquake also hit the northernmost island of Hokkaido during the quarter, causing fatal landslides and widespread blackouts.

Until recently, Japan has been keeping up moderate growth under Prime Minister Shinzo Abe’s “Abenomics” policies based on a deflation-fighting stimulus program of cheap lending.

But other factors are hurting the economy, such as the nation’s continuing labour shortage and slow wage growth.

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Yuri Kageyama is on Twitter at https://twitter.com/yurikageyama

On Instagram at https://www.instagram.com/yurikageyama/?hlen

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