China’s chances of escaping the trade conflict with the U.S. with only minor damage to its economy just got slimmer.
On Friday, U.S. President Donald Trump doubled down on his threats to impose higher tariffs on the nation’s goods, saying he’s ready to tax all imports “at short notice.” While economists see the immediate impact of trade tension as limited, the effect on economic confidence may be larger, warned former People’s Bank of China Governor Zhou Xiaochuan.
Trade data for August released Saturday echoed both the cause and effect of the standoff with the U.S. — the surplus with the U.S. rose to a record, while overall export growth slowed. A lone bright spot may be faster-than-expected import growth, signaling that domestic demand in the world’s second-largest economy is holding up for now.
“With further large-scale U.S. tariff measures imminent, Chinese exporters will be hit hard and China’s GDP growth rate in 2019 is likely to be dented,” said Rajiv Biswas, Asia Pacific chief economist at IHS Markit in Singapore. “If the U.S. keeps ramping up its tariff measures against China, the export sector will face a long, hard road ahead despite government measures to mitigate the impact.”
Hours before Trump’s Friday threats, China announced measures to support some of the exporters targeted by the barrage of higher duties. The Ministry of Finance said it will raise export rebate rates for 397 goods, ranging from lubricants to children’s books, meaning that firms shipping such products abroad will pay less value-added tax. The new rates will be effective from Sept. 15, the ministry said in a statement on its website.
Chinese exporters are feeling the pain as trade tensions between the world’s two biggest economies worsen. Data released Saturday showed that China’s trade surplus with the U.S. widened to $31.1 billion during the month, according to Bloomberg calculations. The rise came despite exports climbing at the slowest pace since March. Shipments rose 9.8 percent in dollar terms, the customs administration said Saturday. Imports climbed 20 percent.
“Exports to the U.S. grew at a faster pace than the previous month as exporters front-loaded orders before the additional tariffs on $200 billion Chinese goods take effect,” said Gai Xinzhe, an analyst at the Bank of China’s Institute of International Finance in Beijing. Faster U.S. economic growth also pushed up demand, Gai said.
The key driver of China’s surging surplus with the U.S. is Trump’s Keynesian stimulus when the economy was already near full capacity, said David Dollar, a former U.S. Treasury attache in Beijing and now a senior fellow at the Brookings Institution in Washington. “The import tariffs are not likely to change that,” he said.
China though is wrestling with a policy-induced economic slowdown that’s collided with uncertainties over the impact of the trade war. That’s prompted leaders to ease their campaign to curb debt as they seek insurance against the risk of a future economic downdraft.
“Export growth could decelerate to 5 to 10 percent over the next few months, then slowing more next year on high base, trade tension and a broad slowdown of the global economy,” Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd., wrote in a note Monday. “The US-China trade tension is escalating given the talk from President Trump last Friday.”
What Our Economists Say… “Export growth will slow to mid-single digits in 2H this year, down from more than 10% in 1H. The Chinese authorities have turned to a more accommodative policy stance. We expect them to further step up the fiscal and monetary policy support.”– Qian Wan and Justin Jimenez, Bloomberg Economics
Despite a shift to policy easing, falling export growth will exert increasingly stronger pressure on Beijing, said Lu Ting, chief China economist at Nomura International Ltd. in Hong Kong, in a note Saturday. Because value-added exports contribute about 10 percent of China’s GDP, the incoming export slowdown indicates it may take longer for China’s growth to recover, he said.
In the event of an all-out trade war, China could be hit harder by a change in market sentiment than a direct impact from tariffs, the PBOC’s Zhou said in an interview with Bloomberg Television.
“People may become nervous,” he said. “Nobody really knows. Suddenly there is a trade war. They may change their mind in terms of stock market investment.”