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China’s Economy Slows But Its Surplus Grows: CEO Daily

July 20, 2019, 8:23 AM UTC
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Good morning.

Last weekend China released its economic data for the second quarter. It didn’t look good. GDP growth slowed to its lowest level in 27 years, shuffling in at 6.2% since the second quarter last year – when the trade war began.

President Trump was quick to present the slowdown as evidence that the war is working and tweeted out: “The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving.”

Perhaps thousands is a stretch. Nikkei Asian Review reported this week that 50 major multinationals – including Apple and Nintendo – have announced or are considering moving a percentage of their manufacturing outside of China i.e. the percentage that makes goods bound for the U.S.

That manufacturing exodus started before the trade war began, as companies sought lower labor costs and direct access to new markets. Most manufacturers will keep a hub in China because the Chinese market is still so valuable. Consultants call that a “China plus one” production model, but the trade war has certainly made getting a “plus one” more prudent.

Naturally, China disputes that its poor Q2 results signal that Trump’s tariffs are working. True enough, China’s economy was slowing down anyway and the government is tackling a slew of issues besides trade – such as unstable debt piles, ineffective infrastructure investments, a retiring workforce and good old, generic normalization.

But Bi Jiyao, vice president of the Chinese Academy of Macroeconomic Research, was dispatched to New York to argue Beijing’s side of the story: that the trade war is damaging the U.S. more.

Bi said the slowdown was due mostly to Beijing reducing manufacturing overcapacity and that, meanwhile, U.S. exporters had lost their share of the Chinese market. “The US has lost market share in China. Now you rank as the No 3 trading partner with China, overtaken by the Asean region,” Bi said.

U.S. exports to China dropped 30% last month. China’s exports to the U.S. dropped too, but only by 8%, springing the U.S. trade deficit on goods to $30 billion. Reducing the trade deficit was one of Trump’s louder rallying cries for the trade war, so watching the trade gap widen must seem like a defeat.

But then who’s winning overall? Well, no one, for now. Negotiators reconnected by phone this week but in-person talks don’t look likely before the end of the month. As Treasury Secretary Steven Mnuchin puts it, “There are just a lot of complicated issues.”

Enjoy the weekend!

Eamon Barrett
– @eamonbarrett49

Economy and Trade

Tanking the trade talks. The U.S. government approved a $2.2 billion arms deal to Taiwan last week and Beijing is not happy. Mainland Chinese authorities have threatened to sanction any U.S. companies that sell weapons to the self-governing island of Taiwan. General Dynamics, for example, makes the Abrams tanks being sold to Taiwan; it also makes Gulfstream private jets, which are a popular toy for the ultra-rich in China. New York Times

Sunken treasuries. China’s U.S. Treasuries holdings fell for three straight months through to May, dropping $2.8 billion to $1.11 trillion. Chinese media suggested previously that China could sell-off its U.S. debt as a tactic in the trade war, but not many Western economists think that’s likely. CNBC

Innovation and Tech

Didi dares. China’s ride hailing giant Didi wants to relaunch its carpool service Hitch, which it pulled from the platform last year following two murder cases involving Hitch drivers. Didi had once advertised Hitch as a potential way to meet romantic partners. The service allowed users to review and rate other customers and displayed passengers' personal information. The proposed relaunch, which is being submitted for public review, minimizes those features. Reuters  

Google it. Billionaire Peter Thiel suggested Google has been infiltrated by Chinese spies. Although Thiel offered no proof, President Trump tweeted that his administration will investigate the claims. Trump’s tweet came hours before Google executive Karan Bhatia gave testimony to a Senate committee where he said Project Dragonfly – a secret undertaking to develop a censored search engine for China ­­– had been “terminated.” One former White House security adviser credited Thiel’s claim. Wall Street Journal

Electric network. China State Grid and real estate giant Evergrande launched a joint venture to roll out a nationwide network of charging stations for electric vehicles. While China’s EV market has boomed, the necessary charging infrastructure hasn’t followed suit, with most owners charging at home. Currently, state-owned charging points are mostly in public spaces – such as highways – but the partnership could help State Grid deploy EV chargers in residential properties. Caixin

In Case You Missed It

Donald Trump is wrong – drag on Chinese growth are homegrown FT 

Users are unknowingly training WeChat’s realtime image filtering system TechNode 

BMW, Tencent to open computing center in China for self-driving cars Reuters

China scrambles to stem manufacturing exodus as 50 companies leave Nikkei Asian Review

Vietnam Is Receiving Diverted U.S. Orders From China. That Doesn’t Mean It’s Winning the Trade War Fortune

Politics and Policy

Didn’t Gou far. Foxconn founder Terry Gou lost his bid to become the next opposition party nominee in Taiwan, losing to Beijing-friendly Han Kuo-yu, who is the current mayor of Kaohsiung. Gou resigned as chairman of Apple manufacturer Foxconn last month to pursue the Taiwan presidency. It’s unclear if Gou will now run as an independent or return to Foxconn. Bloomberg


This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.