Trump Lands a Blow, But No Knockout, to China’s Slowing Economy

(Bloomberg) --

U.S. President Donald Trump's latest tariff threat will damage China's already slowing economy and force new measures by policy makers in Beijing to head off a deeper slump.

Economists estimate the threatened 10% tariffs on a further $300 billion of Chinese goods could mean the pace of growth will test the lower bound of the government's targeted range of between 6% and 6.5% this year -- if not breach it.

Yet a heavy arsenal of monetary and fiscal options mean both the government and People's Bank of China have significant room to respond. Authorities can ramp up spending or try to roll out shovel-ready infrastructure projects to offset any hit to employment. The PBOC also has a deep policy tool kit that includes further interest rate cuts and other measures to stoke lending.

There's also the option of allowing the yuan to test 7 against the dollar to cushion exporters.

“If such additional U.S. tariffs were imposed, they will put further pressure on growth in China, but probably not enough for Beijing to panic,” said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong.

Mixed Signals

The threat of new tariffs comes amid mixed signals on China's $14 trillion economy. While gauges of factory sentiment showed signs of improvement in July, other readings point to ongoing weakness. Exports remain weak, business sentiment has soured and slowing factory prices are threatening to slip into deflation.

Beijing on Friday pledged to respond if the U.S. insists on adding extra tariffs to the remainder of Chinese imports.

“If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures,” Foreign Ministry spokeswoman Hua Chunying said at a briefing in Beijing, without elaborating.

Economists at Standard Chartered estimate the additional tariffs could lower China's annual GDP growth by 0.3 percentage points, holding the overall pace above the key 6% level through additional government support.

Growth Hit

When existing tariffs that the U.S. has imposed are factored in, levies on a total of $550 billion of Chinese goods could slow annual GDP growth by 0.9 percentage points, economists led by Ding Shuang wrote in a note.

“If the 10% tariffs on $300 billion of Chinese imports is further raised to 25%, as indicated by Trump in his tweets (that is the U.S. imposes 25% on $550 billion of Chinese imports), the negative impact on China's annual GDP growth would increase from 0.9 percentage points to 1.2 percentage points,” they wrote.

Citigroup economists see a 50-basis-point hit to China's growth on the imposition of 10% tariffs and a hit of 75 basis points if those duties climb to 25%. It would also threaten about 2 million jobs in a market where 11 million are created annually.

“Monetary policy will likely become more accommodative,” Citigroup economists led by Li-Gang Liu wrote in a note. They expect 50 basis points of cuts to the PBOC's reserve ratio requirements and a possible lowering of the benchmark rate too.

“On the exchange rate front, we think the RMB now has a higher probability of breaking 7,” they wrote, referring to the yuan's official name, the renminbi.

Reform Focus

China's top leaders had signaled they're reluctant to roll out major stimulus measures, instead focusing on reforms and targeted policies such as corporate tax cuts.
The country has other options too.

Trump's hawkish policies may accelerate China's search for new markets around the globe, while also pumping up home-grown consumption, said David Dollar, a senior fellow at Brookings Institution. “The new tariffs won't help but China will focus on other markets and on domestic demand.”

However it plays out, optimism among economists that both sides can reach a trade deal is rapidly fading. Instead of a near-term agreement, it's more likely the two countries are set for a long and protracted economic conflict.

What Bloomberg's Economists Say

“President Donald Trump's threat to hike tariffs on another swathe of Chinese goods, if implemented, will smack the economy just as it struggles to climb out of a double-dip slump. China's measured easing in response to its slowdown so far means there's plenty of room to step up support.”
--Chang Shu and David Qu

The longer that goes on, the bigger the hit to both Chinese and global growth.

“Chinese leaders will be reluctant to negotiate under threat – even stepping up agricultural purchases at this point would make it appear that China is folding to Trump's strong-arm tactics,” said Michael Hirson at the Eurasia Group.

To contact the reporters on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net;Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Michael S. Arnold

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