Events in the economic world continue to move very quickly. I note that at some point over the weekend President Trump responded to an issue I raised last Tuesday.
Smartphones and several other categories of products will be exempt from sweeping tariffs imposed by the Trump administration earlier this month, a filing showed late Friday. That amounts to a big reprieve for Apple and others that make many items in China. ( Wall Street Journal)
The issue is that as I noted last week it will take time to switch production on the scale required.
The majority of Apple’s iPhones are still assembled in China by partner Foxconn.
China accounts for around 80% of Apple’s production capacity, according to estimates from Evercore ISI in a note last month.
Around 90% of iPhones are assembled in China, Evercore ISI said. ( CNBC)
Also there is the issue described by the band Middle of the Road.
Ooh we, chirpy, chirpy, cheep, cheep
Chirpy, chirpy, cheep, cheep chirp.
Production went to China because costs and labour costs in particular we low and there is no real way that labour costs in the US will be anything like that. A robot future could change that but such developments will take years.
Returning to the Chinese economy the first estimates are for a material gain.
Trump’s latest tariff exemptions on consumer electronics and semiconductors could reduce the negative impact on China’s economy by 0.4 percentage points, if it were to last, according to Citi The reprieve announced Friday covered $100 billion of goods — more than a fifth of total US imports from China last year — the bank’s economists including Xiangrong Yu wrote in a note. ( CN Wire)
The Stock Market
We did see a bit of a relief rally earlier today as other markets also rose.
AT CLOSE, HANG SENG INDEX, HANG SENG TECH INDEX BOTH UP OVER 2%; SHANDONG GOLD JUMPS NEARLY 10%, XPENG GAINS OVER 6% (mktnews.com)
I will return to the issue of Gold later but for now staying with equities the CSI 1000 index was up 1.3% at 5938.
As to free markets well as we have looked at before the Chinese version of the Plunge Protection Team is on alert.
“National Team” Provides Support to #China Market, Further Gains Depend on Economic Recovery and Earnings Revisions, Says Goldman Sachs. ( Yuan Talks)
Trade sees a Trump Boost
This morning’s trade figures release encompassed several of our themes.
China‘s exports surged 12.4% in March, surpassing expectations due to businesses frontloading shipments to avoid high U.S. tariffs. Imports, however, fell 4.3%, reflecting continued weakness in domestic demand. The growth in exports was much higher than the 4.4% forecast, while imports declined more than anticipated, with economists expecting a 2% drop. ( CN Wire )
As you can see businesses were doing the best they could to avoid what was then the expected tariffs. Plus the import numbers are another example of how domestic consumption has struggled and in particular it is another signal of the issues created by the property crunch. Also it is hard not to have a wry smile at the way the anticipation of policies to reduce the Chinese trade gap have in the short-term boosted it.
Another bit of the release caught my eye.
In the first two months of the year, export growth slowed to just 2.3%, marking the slowest increase since April 2024. Imports saw a sharper-than-expected decline of 8.4%, the steepest drop since mid-2023. ( CN Wire)
Whilst we started bu looking at something of a blink by President Trump the lower import figures show that the economy continues to have issues.
Economic Growth
We can look at the pressure being applied to the Chinese government via this as we know that it has a 5% GDP growth target. Whereas others are shifting their view.
Goldman Sachs cut its real GDP growth forecast for China last week to 4 per cent, from 4.5 per cent, citing “sharply declining exports to the US”. ( Financial Times)
Plus there is this.
“In the worst-case scenario where China exports nothing to US and completely halts all manufacturing investments linked to US exports, the GDP drag would reach 3 ppt.” ( Yuan Talks)
Another reason to for Chinese rulers to be troubled is that the Financial Times has published a piece saying they are in a good place.
The third reason why the China trade war will fail is China itself. At first glance China seems worse off now than the US: it has lost access to one of its biggest export markets, and seems diplomatically isolated. But in fact, it is well prepared to fight a war of economic attrition against the US.
Is it “well prepared”?! The next bit is only convincing if you are unaware of what Chinese economic policy has been in recent years.
China may be losing demand from the US, but this can be replaced by domestic consumer demand, which has been abnormally weak thanks to overly tight monetary policy, and an obsession with pouring state resources into manufacturing. Xi Jinping has reversed course and is now serious about boosting domestic demand.
It has been policy to raise domestic demand for some time and the best critique is provided by the lower import numbers we have just looked at. I think that trumps being serious. Indeed Michael Pettis thinks that rather than getting better things may be deteriorating.
China, in other words, continues to be unable to translate surging export revenues, through a rise in wages, into rising imports.
Or to be more specific.
This implies that so far this year we have seen a continuation of last year’s widening of the gap between…Chinese production and Chinese consumption, which in turn shows up partly as a reluctant increase in domestic investment (and, with it, a sharp deterioration in the country’s debt burden) and mostly as a widening of China’s trade surplus.
Currency Wars
Those long the Chinese currency should be rather nervous that our valiant Financial Times opinion piece writer Arthur Krogler things this.
Despite some market fears, China can stabilise without a major currency depreciation. Beijing has slightly relaxed its controls on the renminbi to absorb some of the tariff pressure, and might let it fall another per cent or two. But a convincing move to demand stimulus will bring in fresh capital flows, supporting the exchange rate.
Move along now nothing to see here……
Gold
This is an interesting one which swings in both directions. Firstly the Chinese have long been keen gold buyers.
Welcome to Shuibei in Shenzhen, a former fishing village in southern China that’s become the epicenter of the nation’s voracious appetite for gold, and a street-level barometer of economic and market forces impacting demand. More than 10,000 businesses are clustered across several city blocks, a labyrinth of opulence that’s among the largest gold retail markets in the world. ( Bloomberg)
With the price of Gold above US $3200 well done to them. But there is a kicker as Gold has been used by the wealthy as one of the ways of getting money out of the country.
Comment
Whilst the move over the weekend was a net gain for China we also see that it too has economic weaknesses. Like us it has increased its debt. On the upside today’s money supply numbers suggest growth but have contradictions.
China’s #M2, a broad measure of money supply that covers cash in circulation and all deposits, climbed 7% to CNY326.06 trillion (USD44.7 trillion) as of March 31 from a year earlier. #M1, which covers cash in circulation, demand deposits, and clients’ reserves of non-banking payment institutions, rose 1.6% to CNY113.49 trillion (USD15.6 trillion). ( Yicai)
On the face of it the broader measure is strong and with little inflation one might think prospects for 2026 and beyond are good. But if so why is M1 so weak? We see another numerical version of a conundrum.