Europe Awaits China’s Stimulus Signal as Export Economy Suffers

The world’s second-largest economy is about to set its annual growth target and other policy priorities amid a sharp slowdown in output and the turbulence of a trade war. For Europeans, the risk is that the kind of measures announced by Li will provide much less extra oomph for their own economy than in the past.

China’s Policy Summit in Spotlight as Economy Seeks Stability-

China has signaled that it wants to stick to its recent approach of trimming taxes and funneling bank loans to the private sector, rather than splurging on credit-fueled, state-led investment that pulls in the capital goods that European firms excel at. Yet even as signs of a pickup appear, President Xi Jinping has hinted that he’s ready to soften that stance if need be.

“China’s support measures are more targeted toward Chinese consumption and not, as under the previous measures, a large credit program that supported investment and thus European exporters,” said Juergen Michels, chief economist of BayernLB in Munich. Even if China boosts its stimulus later in the year, he doesn’t expect the euro area to benefit much

The euro area’s third-largest buyer of goods plays a central role in the outlook for the currency bloc. Exports to China tumbled last year, forming part of the ECB’s assessment that its slowdown hinges largely on external uncertainties. Growth in China is expected to slow to 6.2 percent this year from 6.6 percent in 2018.

Adding to that is a backdrop of weaker demand globally, mounting protectionism, and strained ties with the region’s other top two trade partners, the U.S. and U.K. The narrative is one that is likely to be mentioned when the ECB meets to set policy on Thursday.

Trade Woes

Germany, Europe’s powerhouse, is likely to shoulder the brunt of the slowdown. There, an industrial slump nearly pulled the country into a recession at the end of last year. According to Liu Peiqian, Asia strategist at Natwest Markets Plc in Singapore, Chinese support for infrastructure and auto consumption may still lift German industrial exports, “but that support this time will be weaker than before.”

Another factor that doesn’t bode well for the euro area is U.S.-China talks on a more equitable future trading relationship. Even if the two countries strike a deal that reduces uncertainty, Europe risks losing if goods it previously exported to China get sourced in the U.S., Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said in a recent Bruegel blog post.

“A hastily agreed trade deal between China and the U.S. may be good to ease the negative sentiment in global financial markets,” she said. “The non-market way of reaching the deal, however, will probably bring a large cost for Europe since it will probably divert European exports to China toward U.S. ones.”

Source- Bloomberg