Trade war with US is handbrake on growth in world’s second biggest economy

This article is more than 1 year old

This article is more than 1 year old

Sales of cars in China have dropped for the first time in almost 30 years, a sign of the importance of ending the country’s trade dispute with the US as the world economy begins to falter.

As the US and China appeared to be edging closer to ending the trade dispute between them on Wednesday, the figures illustrate how the bitter standoff, as well as sluggish local demand, have acted as a handbrake on growth in the world’s second biggest economy.

Passenger vehicle sales in mainland China dropped by 5.8% last year to 22.35m, according to the China Passenger Car Association, the first reverse in the world’s biggest car market since 1992.

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The development came as financial markets around the world rallied following signs of a breakthrough in trade talks between Washington and Beijing, after three days of talks in the Chinese capital.

The FTSE 100 closed on Wednesday at a five-week high, ending the day 45 points higher at 6,906. Markets across Europe also recorded gains and Wall Street’s Dow Jones index of the 30 biggest US companies had rallied by more than 150 points midway through Wednesday’s trading session.

US officials said China had pledged to buy a “substantial amount” of agricultural, energy and manufactured goods and services, adding that both countries had discussed “ways to achieve fairness, reciprocity and balance in trade relations”.

The meetings this week were the first since face-to-face talks between the US president, Donald Trump, and his Chinese counterpart, Xi Jinping, late last year, when a 90-day truce was agreed in the trade war, preventing the imposition of additional tariffs on Chinese goods sold in the US.

However, a deal still needs to be reached by 2 March, when the White House is due to raise tariff levels from 10% to 25% on $200bn (£160bn) of Chinese imports.

Although the Chinese economy had gradually begun slowing before the trade war escalated, the economy has underperformed expectations in recent months amid the tensions.

The International Monetary Fund downgraded its forecast for global GDP growth for 2018 and 2019 on the back of the standoff, while estimating growth in China will fall from about 6.6% last year to 6.2% in 2019.

Factory output in China fell for the first time in two years in December, with analysts warning that the trade dispute had harmed demand. Apple also reported a decline in sales in China, blaming softer consumer appetite as the economy cools.

News of the weak car sales figures is likely to reverberate around the world, after years of growth for western manufacturers selling to China, while adding to the problems facing European manufacturers from Brexit, new vehicle emissions tests and a move away from diesel cars.

Recession fears are growing in Germany, which is home to some of the world’s biggest car manufacturers.

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Jaguar Land Rover announced in October that it would close its Solihull plant for two weeks because of slumping sales in China, which is the company’s largest market. The firm is expected to announce job cuts on Thursday, to ward off the threat from the drop in sales in China, Brexit and a fall in demand for diesel cars.

Despite progress in the US-China trade talks, analysts have cautioned that securing a trade deal remains challenging, while a breakdown in negotiations would trigger fresh turbulence on financial markets.

Joshua Mahony, a senior market analyst at the financial trading platform IG, said: “There is still substantial time left in these negotiations. However, for those hoping to see something tangible this week there could be some disappointment that things are not moving at a faster pace.”