Trump may be winning the trade battle with China. But China may end up winning the war

Gene Kim

The economy is slowing. But longer term, it may end up bouncing back.

• China's economy has taken a beating in recent weeks as the trade war bites. And it may get worse.
• "So far, the trade war has had a much bigger impact on Chinese growth than US growth," Bank of America Merrill Lynch says.
• But Beijing has been throwing all available stimulus options at its economy, and it's just getting started.
• US corporates are feeling the pinch. And longer-term, the US is losing its economic dominance.

Donald Trump may be winning the trade battle with China. But China could still end up winning the war.

China's economy has taken a beating in recent weeks. Manufacturing is contracting for the first time in two years. There's a real-estate crisis. China just posted the first annual car sales decline in 20 years. There's a retail slump. Foreign investment into China has plummeted.

The country just posted its worst quarter of growth since the financial crisis. And Chinese equities capped 2018 with a tumble of 27%, the world's worst performing market.

"So far, the trade war has had a much bigger impact on Chinese growth than US growth," Bank of America Merrill Lynch said in a recent note.

Read more: China stock markets rally on Trump optimism before trade talks: 'Good things are going to happen'

And it may get worse. If the US levies an additional 15% tariff rates on Chinese exports after March 1, Citigroup says China's overall export growth will plunge to 5.1%. (It was a whopping 15.5% in October 2018.)

In a survey, the US Chamber of Commerce found that about 30% of US companies in China say they are weighing adjustments to their supply chain. The diversion of exports through Vietnam and the Philippines among others is happening faster than expected, Citi said in a January 9 note.

China's fighting back

Beijing has been throwing all available stimulus options at its economy, including tax cuts and weakening its currency. The government just green lighted new rail projects worth more than $125 billion in the past month to counteract the slowdown.

Those efforts, and the first in what's likely to be about four cuts to banks' reserve requirement ratios, should help turn things around, possibly by the spring, BofAML says.

And HSBC says it's just getting started: "It is possible that the government steps these up more meaningfully, and at a faster pace than the market anticipates," HSBC economists led by Janet Henry, referring to China's fiscal and monetary stimuli, said in a recent report.

She also said China is adapting: "China has also been better than the US at diversifying its export growth to more rapidly-growing markets."

And now the US is feeling the pinch, too

The impact of the trade war is starting to be more keenly felt in the US, meanwhile.

"The impact of the trade war on US confidence seems to be growing," BofAML said. "The US had a big offset to the trade war - a double dose of tax cuts and spending increases. Now, with the stimulus fading, confidence seems more sensitive to news that would have been ignored in the past."

US corporates have felt the pinch. While Apple dominated headlines after blaming its weaker sales outlook on a slowdown in the country, a chorus of other US corporates have been sounding the alarm for months: Shipping company Maersk, Ford, agricultural giant Cargill, and General Motors have all blamed either a China slowdown or the trade war specifically for earnings woes.

And the US is losing its dominance. Standard Chartered Bank said this week that America could lose its position as the world's biggest economy as soon as next year, and once that happens, will likely never regain the top spot as developing Asian economies power ahead.

The bank says China will most likely nab the world's biggest economy title some time in 2020. By some measures, China is already there.