US-China trade tensions to deepen in 2019, hitting Chinese economy: Moody’s

Beijing will be tested with more policy complexity in 2019 as tensions with Washington are set to go beyond trade issues and put further downward pressure on China’s economy, a senior executive of Moody’s said.

“Trade tensions are going to deepen. Those 25 per cent tariffs [on US$200 billion worth of Chinese merchandise] will be implemented,” Michael Taylor, the company’s chief ratings officer for the Asia-Pacific region, said in an interview on Monday.

The warning by the international ratings agency – which downgraded China’s sovereign credit by one notch in May 2017 due to concerns over high debt levels – comes amid hopes of some progress on resolving the trade conflict when US President Donald Trump and Chinese President Xi Jinping meet after the G20 summit in Argentina.

Some analysts believe the two leaders could agree to a “ceasefire” in the trade dispute, with the planned increase in tariffs – from 10 per cent to 25 per cent – scheduled for January 1 put on hold.

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Taylor, who has a long career in crisis management at the International Monetary Fund and several central banks, said bilateral tensions would be difficult to resolve with no “quick or easy solutions”.

“Look at the speech Vice-President Pence gave in Papua New Guinea at the Apec conference. He didn’t just talk about trade, but [also] intellectual property, the South China Sea, forced technology transfers. So there’s a whole long list of issues the US administration is now raising,” Taylor said.

“I don’t think [a deal] can be just a matter of trade, coming to some kind of agreement around a further opening up of China’s markets, or an undertaking to purchase more US exports.”

Despite the imposition of US tariffs on US$250 billion of Chinese goods, Chinese exports to the United States jumped 13.2 per cent in October.

Taylor attributed the rise to Chinese producers fulfilling export orders for next year in advance of the January tariff increase.

“We will see some impact of the tariffs next year in terms of China’s growth,” he said.

Moody’s calculates the tariffs will cut growth by 0.3-0.5 of a percentage point next year if Beijing implements no measures to offset the effect.

China’s economic growth is projected to slow to 6 per cent in 2019, compared to an actual 6.7 per cent in the first three quarters of this year.

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Taylor said the trade war complicated the challenge already faced by Beijing of continuing with its reforms while maintaining economic stability.

“At a time when the economy was already slowing down because of domestic measures, because of the deleveraging measures, on top of that you’ve got trade,” he said.

Since the beginning of August, Beijing has largely shelved its deleveraging campaign, which was helping to tackle China’s excess debt and financial system risks, but which also slowed growth in the real economy.

The government has switched its policy focus to stabilising the economy and, against the backdrop of the 40th anniversary of the reform and opening up policy, has pledged financing support for the country’s struggling private economy.

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Taylor said the government crackdown on shadow banking activities had been positive, as overall debt was now growing at a slower pace than gross domestic product.

But concern was still warranted, he said, as leverage had just been stabilised and the stock of debt had not been reduced.

Beijing must also tackle the high level of implicit debt at the local government level, which it could do through new debt-for-equity swaps, debt write-offs or fiscal allocations, he said.

Moody’s maintained China’s A1 sovereign rating with a stable outlook in early November.

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Taylor said that the risk of a systematic crisis was very low in China because its government had a broad range of tools, including fiscal stimulus and monetary easing, to deal with the growing economic challenges.

“China still has a lot of what we call fiscal space, in terms of the ability of government to take on more debt,” he said.

“Because central government debt is relatively low compared to its peers … there’s still plenty of room for monetary policy stimulus.”

He said also that the reserve requirement ratio – the amount of money banks are required to hold at the central bank – was still “quite high”, giving the central bank further room to reduce it and add liquidity to the banking system.

The People’s Bank of China has already cut the reserve ratio four times this year, although the current level of 14.5 per cent is still much higher than in other major economies.