Investors are obviously on the look out for a trade deal between China and the U.S. to materialize. A tangible deal would certainly jolt the markets to life in both respective countries after a challenging 2018, but traders in leveraged China ETFs like the Direxion Daily FTSE China Bull 3X ETF (NYSEArca: YINN) and Direxion Daily FTSE China Bear 3X ETF (NYSEArca: YANG) have to be wary of other factors affecting the country.
“Today, both the U.S. and China are negatively affected by the current tensions,” said Ludovic Subran, global economist at Euler Hermes. “The big issue is really more the domestic economy and its transformation.”
According to Subran, China has been feeling the pangs of an economic slowdown even before the tariff wars with the U.S. were underway.
“There’s evidence that the latest round of economic reforms started to slow the economy before we got to the tariffs,” said Christopher. “In terms of advancing a mix of expansionary and tightening policies, China is still tinkering with the balance. “They haven’t really found the right combination yet,” he said. “We think they’re still experimenting.”
Slowing Auto and Real Estate Sales
Signs of a cyclical downturn were already evident in the country’s slowing consumption, particularly with sales of automobiles and real estate. Sales in both have been decreasing yearly since 2016.
Per a NBC News report, “Automotive consulting firm ZoZoGo found that car sales in China reversed course last year and fell by 3 percent after roughly two decades of growth, and the country’s largest automotive trade group also has reported sinking sales figures in recent months.”
Availability of Credit
China’s government recently installed stricter regulations to prevent shadow banking, which allows consumers to obtain loans from non-banks. This dried up credit for purchases on big-ticket items, but also dampened real estate investment and infrastructure projects.
“I think the slowdown is primarily a result of the slowdown in credit,” said Lardy. “By the end of last year, credit was growing at the slowest pace in 10 years.”
In the meantime, China is trying to stimulate the economy by cutting bank reserve requirements to help promote more lending activity.
Less Consumer Spending
Of course, tighter financial policies in the past have led to less consumer spending as the amount of credit available deteriorates. Even as the government gets more lax on monetary policy, consumers are less inclined to accept the credit in the face of economic uncertainty in China.
“We also notice households have taken on some debt in recent years, and we think some of them might be reaching their limits,” Christopher said. “Households, we think, are feeling a little bit of a pinch.”