Retaliate, reform, liberalise: the three ways China will respond to new US tariffs
Aidan Yao says it is only natural that Beijing would strike back should Washington impose its next round of threatened tariffs, but it can also be expected to proceed with domestic reforms and a further opening of its market to outside investors, which may ultimately be to its benefit
Though the tariffs are not yet a done deal, Beijing is expected to alter macro policies in three ways.
Second, the rising trade risk will add to the urgency for domestic policy changes. The interaction of an export slowdown and accumulating domestic growth pressure will strengthen the case for more policy fine-tuning.
Beijing has also dispatched its inspection team to check on the fiscal positions of local governments. In contrast with previous years, the team will find that local authorities have underspent relative to their targets. Instead of running a deficit, with net spending of around 2.4 trillion yuan (US$359 billion) – or 2.6 per cent of GDP – the government has accumulated a surplus of almost 400 billion yuan this year.
This austerity, combined with the tightening of private-public partnership projects, has been the root of the tumbling infrastructure investment. Should downside economic risks deepen, fiscal firepower should be unleashed.
While both monetary and fiscal stimulus can be deployed, this will not be a case of flooding the market with liquidity and re-enacting a massive infrastructure build-up, which would undo the good work on deleveraging and consolidating local government finances, still the main thrust of Beijing’s risk management operation.
Unless domestic conditions worsen to such an extent that they pose a systemic threat, the government should be able to keep its composure by fine-tuning policies, not outright easing.
Finally, Beijing is expected to further liberalise its market and economy to diversify trade and strengthen domestic demand. If the Sino-US trade dispute has a silver lining, it must be the urge for China to accelerate structural reforms.
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On the external front, Beijing has accelerated market liberalisation. By opening up the domestic financial system, cutting tariffs and reducing hurdles for foreign direct investment (FDI), China is embracing more, not less, interaction with the outside world, unlike the protectionist US.
A trade war is unequivocally bad for global trade. But with an economy rebalancing towards domestic consumption and tech-driven growth, China could use it to its advantage.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers