- The US-China trade war looks set to escalate. US President Trump will most likely impose a 25% tariff on another US$ 200 bn of imports from China. China will use its available space for retaliatory measures worth US$ 60 bn.
- The trade conflict comes on top of China’s regulatory tightening of the shadow banking sector, which has already led to a negative credit impulse but affected the real economy so far only by slowing infrastructure investment.
- Given this double risk, China is likely to recalibrate its economic policy:
- We expect monetary policy to further ease liquidity in order to offset the negative impact from regulatory tightening on credit growth, but not to give up on its de-risking program altogether.
- We see fiscal policy in charge to mitigate the negative impact from the trade conflict in order to protect the 6.5% 2018 growth target. For 2019, we stick to our 6.2%-6.3% growth forecast, assuming China’s reform agenda to be held up.