Beijing vows not to flinch, but tariffs likely to bite hard
Trump threat to impose more taxes across the board could cut Chinese exports to US by a third if followed through
Over the past week economists have been dusting off forecasting models drawn up last year when US president Donald Trump first threatened to tax about half of all Chinese imports at 25 per cent.
Most analysts estimate that the latest tariffs, which were first scheduled to be imposed on January 1 but then delayed until last Friday, will have a significant impact on already slowing growth in the world’s second-largest economy — if fully implemented in about three weeks and not superseded by a trade agreement later this month or next.
But Chinese officials and experts continue to project confidence that their political and economic system will weather an all-out trade war better than the US. After wrapping up a fruitless 11th round of formal trade talks in Washington last week, vice-premier Liu He vowed that neither his negotiating team nor the Chinese people would “flinch” in the face of higher US tariffs.
“I was just playing with my old model of trade-war impacts,” Bo Zhuang, chief China economist at TS Lombard, said. According to Mr Zhuang’s estimates, if implemented for a full year the latest tariffs would reduce China’s exports to the US by $75bn — and by $170bn if Mr Trump follows through on his threat to impose a 25 per cent tariff on all Chinese imports.
The latter figure would be equivalent to one-third of the value of Chinese exports to the US in 2017, which amounted to $505bn, and translate into a 0.9 per cent decline in China’s nominal GDP, according to Mr Zhuang’s estimates.
Over the first quarter of this year, merchandise trade between China and the US fell by $25bn over the same period in 2018, with Chinese exports to the US down 9 per cent, or $45bn in absolute dollar terms, and US exports to China down 30 per cent, or $39bn in absolute dollar terms.
“Owing to the sheer size of China’s economy and its declining reliance on exports, the immediate impact of the trade war on growth should be manageable,” Mr Zhuang predicts. As a percentage of GDP, China’s total exports fell from 35 per cent in 2006 to 18 per cent in 2017, with exports to the US now equivalent to just 4 per cent of GDP.
Analysts at Moody’s project that if all Chinese exports to the US were taxed at 25 per cent for a full year, real GDP growth would slow by 1.2 percentage points to just over 5 per cent.
As unwelcome as this would be for President Xi Jinping and Mr Liu, who has simultaneously been leading a campaign against risky financial practices that has inadvertently starved private sector companies of capital, Chinese analysts argue that the party controls levers that Mr Trump can only dream of. While the US president struggles to get his favourite candidates appointed to the Federal Reserve board, the Communist party has direct leverage over everything from the renminbi’s dollar exchange rate to central bank monetary policy.
“China has its own ways to support exports, such as the exchange rate and tax rebates for exporters,” says Huang Weiping, an economics professor at Peking University. He notes that as trade frictions with the US intensified last summer, the carefully managed renminbi fell almost 8 per cent against the dollar — nullifying much of the impact of Mr Trump’s initial tariffs.
On Monday the renminbi fell 0.5 per cent against the dollar to $6.87, and almost 1 per cent to $6.94 in offshore trading. Since Mr Trump first threatened to escalate the trade war on May 5, the renminbi has fallen 1.3 per cent against the dollar to a five-month low.
Chinese analysts say Mr Trump missed a golden opportunity to exert maximum pressure on China’s economy when he delayed implementing his tariff increase on January 1 — and then again on March 1.
In mid-January, Mr Liu and Premier Li Keqiang were so worried about the private sector’s struggles that they made high-profile visits to the headquarters of each of China’s “big four” state banks, instructing them to lend more to small and medium-sized enterprises.
The People’s Bank of China has similarly tried to help the private sector by allowing banks to reduce their reserve levels on condition the freed-up capital flows to SMEs. By mid-March much of the gloom had lifted and China’s parliament rubber-stamped tax cuts and other stimulus measures worth Rmb2tn ($291bn), helping to boost first-quarter GDP growth to a higher-than-forecast 6.4 per cent.
“The fourth quarter was the bottom of the economic cycle,” said one analyst at a government-affiliated think-tank who asked not to be named.
Other analysts agree. “China has enough monetary and fiscal firepower to stimulate its economy and achieve its 6 per cent growth target even in the face of this external pressure,” Arthur Kroeber of Gavekal Research wrote in a research note on Monday. Beijing’s strategy, he added, was “to play it cool and wait for an erosion of market and economic sentiment [in the US] to convince Trump that his political interests are best served by flipping back to dealmaker mode”.
The party, by contrast, has little to worry about in the way of criticism at home given its iron grip on China’s domestic media and internet, but is also aware that sentiment remains fragile and could sink again as the trade war enters a new phase. As the government think-tank analyst said: “We have to report and get consent for interviews now.”