China: How much cooling is Beijing likely to tolerate?

The US-China trade war looks set to escalate. According to press reports, US President Trump will most likely impose a 25% tariff on imports from China worth US$ 200 bn (while repeating his threat to tax about all of imports from China).

Authors: Christoph Siepmann

Highlights:

  • 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.

Read the full publication below.

CHINA: HOW MUCH COOLING IS BEIJING LIKELY TO TOLERATE?

RELATED INSIGHTS

US INFLATION: RISING, NOT SOARING
Since the beginning of the year financial markets have started increasingly to worry about a sudden and strong re-turn of US inflation. Behind this stands the double boost from domestic demand coming from the widely expected re-opening of the economy in spring and the large fiscal stim-ulus the incoming Democratic administration will most likely deliver.
CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.