Fathom’s China Momentum Indicator 2.0, our preferred measure of the pace of economic activity in China, slowed to 4.6% in June, the weakest reading since August 2016. Gary Cohn, former chief economic advisor to Donald Trump, argues that this slowdown reflects a strategic decision by China to rebalance the economy at a time when any negative impact on growth can be blamed on US trade sanctions. However, we believe that China was slowing regardless. With the consumer share of total import demand on a downward trend since 2016, we also find little evidence to suggest that China is successfully rebalancing. Instead, policymakers are resorting to their tried and tested playbook, including currency depreciation. Indeed, since the first threat of tariffs in March 2018 the renminbi has weakened by 11% against the US dollar, neutralising what we estimate to be an increase of around 10 percentage points, over the same period, in the average effective tariff imposed by the US on imports from China. This undermines any hopes of rebalancing, while further frustrating trade relations, as evidenced by the US administration branding China a currency manipulator. It also acts as a fiscal transfer from China to the US.
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