China’s economic outlook will worsen if US puts tariffs on remaining exports, Fitch Ratings says
- US President Donald Trump’s trade war escalation could have severe impact on Chinese economy
- China’s growth predicted to be 6.1 per cent this year absent any further sanctions, but it may need to take more aggressive policy action if tariff increases comes in
China’s economy could lose momentum this year, should the United States carry out its plan of imposing tariffs on most remaining Chinese exports, according to Fitch Ratings.
The move would put pressure on Beijing to come up with additional stimulus measures to counter the impact and would further imperil the Chinese economy, which had looked to strengthen in the first quarter of the year, but which has since shown signs of weakness.
The economy grew at 6.4 per cent in the first quarter this year, the slowest growth rate in almost 30 years, due in part to the increasing impact of the US trade war, but this was still better than the expectations of many analysts.
Days later, the US instigated a process of rolling out tariffs of up to 25 per cent on what Fitch estimates to be a further US$290 billion of Chinese goods, representing almost all of the imports that had yet to be subject to tariffs, excluding certain pharmaceutical goods and rare earth minerals. The US government puts the figure at US$300 billion.
While the increase from 10 per cent to 25 per cent would have minimal effect on China’s policy response, the additional tariffs would mean Beijing could be forced to switch to more aggressive policy easing. Options include credit stimulus, meaning lowering benchmark interest rates or even quantitative monetary easing, Fennell said.
“The policy trade-off will be much more challenging if tariffs are levied on [almost all remaining] Chinese exports,” said Fennell. “To offset the growth impact, the one tool that has been used most frequently in the past is the credit channel. It is unclear at this stage which is the policy tool that the authorities might use to counter some of the growth pressures. Or potentially one final scenario is that policymakers are more comfortable with letting growth slow.”
Before the breakdown in talks and escalation in tariffs, China had been “making much more use of fiscal policy” to combat the economic slowdown, said Fennell. “In our assessment [to date], the credit growth rate has only gone up roughly by one percentage point. Financial vulnerability is going to increase a bit this year because we have nominal GDP slowing.”
In the midst of the economic slowdown, Beijing has put the brakes on, but not yet ended, its campaign to reduce debt and risky lending. The two-year deleveraging campaign has cut off informal “shadow banking” channels for many small to medium companies, helping lead to a record level of corporate defaults.
Fitch expects that shadow financing activity will moderate to around 50 per cent of China’s GDP by end of this year from a peak of 70 per cent in 2017 as a result of the government crackdown.
To date, the Chinese government has implemented nearly 2 trillion yuan (US$18.3 billion) worth of cuts to taxes and corporate social contribution fees this year to help cushion the sluggish growth in domestic consumption and investment.
The People’s Bank of China, the central bank, has sought to boost bank liquidity by reducing the reserve requirement ratios for smaller banks, as a means of boost lending to smaller firms hit hardest by the trade war. But it has so far refrained from more aggressive monetary easing such as cutting benchmark interest rates.
