US, China both aiming for soft landing amid trade war

Washington

THE world's two biggest economies are separately struggling to come in for unparalleled, simultaneous soft landings, an effort complicated by the trade war they are waging at the same time.

It's hard enough for the US or China to pull fiscal and monetary levers to manage a step-down in growth alone. For the two to try to do it concurrently makes what is already "a fairly narrow target even narrower", said Deutsche Bank Securities' chief economist Peter Hooper.

A misstep would also turn what's supposed to be a controlled touchdown of their economies into something much worse - a worldwide recession. While most economists say that's unlikely, they acknowledge that it can't be ruled out, especially if the temporary trade truce between the two countries breaks down or if equities keep sliding.

"If we get an escalation in trade tensions and another 10 to 15 per cent drop in the stock market, you're looking at enough of a tightening in financial conditions to say that a global recession is a real risk," said Mr Hooper, a former Federal Reserve official.

Negotiations between the US and China in Beijing this week on trade were "extensive, in-depth and detailed" and laid a foundation for a resolution, China's Ministry of Commerce said on Thursday.

The attempted manoeuvre by the Fed and Chinese authorities comes as the global economy enters 2019 showing signs of slowing, with the world's No 4 economy Germany flirting with a recession. Complicating the task is US President Donald Trump. He has welcomed China's economic troubles as giving him added leverage in trade talks with the Asian country, while he has attacked Fed chairman Jerome Powell for trying to slow the US economy with interest-rate increases.

Policymakers are cognisant of the dangers and are acting accordingly. Minutes from the Fed's December meeting showed that interest rates could go on hold through March or longer as officials wait for clarity on risks to global growth that could affect the US economy.

Speaking to economists in Atlanta this month, Mr Powell raised the possibility of a pause in the Fed's rate hiking campaign and a change in its balance-sheet reduction plans.

China, meanwhile, continues to roll out measures to put a floor under its economy, including last week's announcement of a cut in the amount of cash lenders must hold in reserves that freed up a net 800 billion yuan (S$158 billion) of liquidity. The Finance Ministry is set to propose a small increase in the targeted budget deficit for this year, people familiar with the matter said.

Maintaining expansions in gross domestic product is tricky because authorities have to walk a fine line between slowing the economy just enough to prevent overheating or financial excesses but not so much as to cause a contraction.

Indeed, the Fed has arguably only accomplished the feat once, in 1994 and 1995, and even then there was a lot of collateral damage, including a hard landing for the bond market. China managed a slowdown in 2015 by ramping up spending, a tactic that cushioned growth but accelerated a build-up in debt that economists warn is unsustainable.

Mr Trump has befogged the Fed's task this time around first by juicing growth in 2018 with tax cuts and stepped-up government spending, and then by effectively acting to restrain it in 2019 as his trade war rhetoric spooked businesses and investors.

"It wrong-footed the Fed twice," said David Hensley, director of global economics for JPMorgan Chase in New York.

The president's unrelenting attacks on the central bank also hurt because they threaten to undermine the Fed's standing with investors and the American public.

"Obviously, the president has the right to comment on the Fed, but I would worry that if it continues or intensifies, it could undermine confidence in the Fed and the market confidence in the Fed's judgment," former Fed chair Janet Yellen said in Atlanta, in a rare joint appearance with Mr Powell and former Fed chief Ben Bernanke.

And while Mr Trump has cheered China's slowdown, Mr Powell and the Fed are concerned about it spilling over into financial markets and the US.

Seeking to allay investor fears of a Chinese hard landing, Mr Powell told the American Economic Association's annual meeting last week that the country's authorities are responding to signs of weakness in their economy with additional stimulus.

"China and the rest of emerging Asia should continue to expand at a still solid pace this year," Mr Powell said.

Some of the deceleration in China's economy was self-induced as policymakers sought to dampen frothy property markets, curb leverage and crack down on shadow banking.

"We had been expecting the slowdown for quite some time now," Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, told Bloomberg.

What did surprise China was Mr Trump's assault on the country's mercantilist economic policies, resulting in tariffs on some US$250 billion worth of Chinese exports to the US, Mr Hensley said. That threatened a bigger downshift in growth than China wanted.

Chinese officials have responded with selective stimulus measures to try and prop up growth while eschewing their traditional approach of opening up the credit spigots.

Cliff Tan, MUFG Bank Ltd's East Asia head of global markets research, said that China may no longer be able to engineer a soft landing of its economy.

"China may see a very rocky landing, lasting five to six quarters sometime over the next four years," Mr Tan wrote in a report to clients. "The primary driver of China's slowdown is not the trade war, but local credit problems."

Either way, the ability of both nations to guide their economies will dominate the global outlook through 2019.

"Soft landings are really, really hard," said Carl Tannenbaum, chief economist at Northern Trust Corp in Chicago. BLOOMBERG