China's economic change shows Trump's trade rant is so 2005

A general view shows a construction site owned by State Grid Corporation of China -- an electricity company that is the country’s largest state-owned enterprise in Beijing.
A general view shows a construction site owned by State Grid Corporation of China -- an electricity company that is the country’s largest state-owned enterprise in Beijing.PHOTO: AFP

HONG KONG (BLOOMBERG) - Donald Trump has fired up his base of supporters with the accusation that China's stealing American jobs and gaming its currency to stoke exports.

"They are a manipulator, grand master level," the Republican US presidential candidate said in a speech at the New York Economic Club last month. He vows to impose punishing trade tariffs of up to 45 per cent if China doesn't change the predatory practices he sees.

Such fiery rhetoric is powerful, but the characterizations are dated - by about a decade.

This year shows the US now has far more to fear from an economically hobbled China, where growth is the weakest in decades. In January, the prospect of a Chinese hard landing contributed to a sell-off in stocks in America and around the world. China's stabilization, through pumping up domestic demand and shifting away from its historic reliance on exports, put a floor under the global economy and markets.

China's efforts to wean itself off of exports were visible in the latest data released on Wednesday (Oct 19), which showed public investment and consumption were key pillars to the country's stable 6.7 per cent growth last quarter. China's services sector now accounts for more than half of its US$11-trillion economy, while exports are shrinking.

"Donald Trump's views on China do seem stuck in a time warp," said David Loevinger, a former China specialist at the U.S. Department of the Treasury and now an analyst at fund manager TCW Group.

China no longer appears the mercantile superpower that Trump represents. That was more applicable back in 2005, when the country's current-account surplus was still swelling and before it loosened a long-held currency peg to the US dollar. The surplus is now less than 3 per cent of gross domestic product, compared with the peak of near-10 per cent in 2007. The IMF predicts a continued drop to just 0.8 per cent by 2021. And rather than actively drive down its currency, China has drawn down foreign exchange reserves to stem its slide and limit destabilizing capital outflows.

Western trading partners, including the US, have abundant evidence for criticizing China over dumping steel on the global market, its glacial financial-market reforms and corporate-debt binge. It's tougher to characterize China as a currency manipulator. True, its currency has weakened 3.7 per cent this year. Yet the yuan has appreciated by more than 22 per cent since China abolished its currency peg in 2005.

In the increasingly unlikely event of a Trump administration that slapped punitive tariffs on China, the move would court a devastating trade war that would hurt both economies, TCW's Loevinger said.

While the US continues to have a gaping goods-trade deficit with China, its exports of services to the country are growing rapidly, reaching US$42 billion in 2014 and making it the US fourth-largest services export market, according to the U.S. China Business Council. Between 2006 and 2014, services exports to China grew more than 300 per cent.

China is also an increasing source of investment capital for the US, as its companies and households seek to diversify their holdings at least in part to the world's No 1 economy.

As No 2 - and No 1 when it comes to global growth contribution - the damage from Trump-style tariffs to China would cause pain felt round the world. It would be highly contractionary, deflationary and wipe hundreds of billions off China's GDP, according to Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets in Hong Kong.

A trade war with China could hamper US access to an economy that's increasingly consumer driven. Retail sales in the country climbed 10.4 per cent in the year through September compared with 2015, a pace that would see them more than doubling by 2023. The gains are vastly outpacing manufacturing, which rose 6 per cent by the same measure."His remarks about the yuan being undervalued and the Chinese stealing US manufacturing jobs were headlines from the long past," Cao Heping, a professor at Peking University's school of economics, said of Trump.

The China issue could feature again in the US campaign when Trump faces off with Democratic rival Hillary Clinton Wednesday night at the University of Nevada-Las Vegas in their final debate. Trump used their first encounter to accuse China of manipulating its currency. Another area where the China question enters: environmental policy. The Trump campaign criticized Clinton for a climate plan that would put costs on the US even as China keeps increasing emissions, the New York Times reported on Wednesday.

Trump hasn't been alone in criticizing trade with China. Former Democratic candidate Bernie Sanders repeatedly highlighted his opposition in congressional votes to trade deals that ended up, in his view, enabling an exodus of US manufacturing jobs to China among other countries.

Clinton has said she will take tougher action against "unfair trade practices like when China dumps cheap steel in our markets." At the same time, she drew a contrast in June with Trump, whom she said "wants to start a trade war with China." She went on: "We went down that road in the 1930s. It made the Great Depression longer and more painful."

The candidates' would-be counterpart, President Xi Jinping, continues to grapple with domestic economic challenges. His government is still relying on cheap credit to keep economic activity moving forward, as private companies limit their investment. Surging house prices in the biggest cities are casting a long shadow.

And China's policy makers have work to do to prove they're committed to opening the economy more to private and foreign competition. There have been tensions over restrictions on foreign investment - so much so that China is considered the most closed of major economies by the Organization for Economic Cooperation and Development.

Few dispute that China's cheap manufacturing base has over time hurt employment and wages at America's factories. In the first eight months of 2016, the US ran up a US$225 billion trade gap with China.

It's also true that China needs to get a grip on its growing debt pile and unproductive state-dominated industries. Researchers at the International Monetary Fund this week said authorities in Beijing need to urgently rein in corporate debt.

Yet unlike the mid-2000s, when China grew at double-digit rates thanks primarily to export-fueled growth, the current Chinese economy is far more balanced.

"Trump's ideas about China sound old to me," said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA in Hong Kong. "But it is also in the world's interest that China resolves its long-standing issues to lift productivity even at the cost of lower growth. That is healthier for the world in the medium run."