Beijing is clearly rattled.
Within 48 hours of Donald Trump’s decisive victory in the US election, Chinese authorities last week, yet again, opted to break out the financial fire hose and spray around a little more cash.
Once again, it was deemed inadequate and left global investors underwhelmed.
The first stimulus round was unleashed in September, after years of bewildering inaction, in an effort to shore up a rapidly deteriorating economy that’s been hammered by a property downturn now entering its fifth year.
So far, the various measures include interest rate cuts, eased lending and property restrictions, and an $US111 billion boost for Chinese stocks.
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On Friday, it announced a $2.1 trillion debt reduction package to help ease the burden on the country’s hugely indebted local government sector, that has been left reeling by a calamitous property bust.
Once again, investors yawned, complaining the measures were nothing more than a debt recycling package designed to shift the debt from a local to a national level.
So far, the raft of measures announced since September have kept iron ore prices in triple figures, much to the relief of Australian exporters. But only just.
While the belated and piecemeal nature of the stimulus rollout has mystified many, some China watchers believe the strategy could come in handy in future as Beijing awaits the full blast of Trump’s trade war and adjusts its response accordingly.
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Trump’s trade war timetable
If Donald Trump lives up to his word, China is expected to lose its World Trade Organisation ‘favoured nation status’ with the US, as a first step, before imposing tariffs on the country and then, possibly, the rest of the world.
According to analysts from investment bank UBS, the ‘China hit’ is expected to be rolled out gradually to avoid a one-off massive inflation hit on the US economy and to give American buyers the chance to source their needs elsewhere.
“We are assuming a 60 per cent tariff hike on about a quarter of US imports from China starting in September 2025, a 60 per cent hike on another quarter of products in January 2026 implemented in two stages with the remainder not facing additional tariffs,” they said in a note to clients this week.
But they admitted it was possible the hit could start sooner, possibly as early as the first quarter of next year.
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What impact would this have on China’s economy?
Even if the world’s second biggest economy was chugging along, the impact would be huge.
But China is in the midst of a painful deceleration as it battles a construction slowdown and one of the biggest property crashes in history, which has hit consumer demand and sent the country into a deflationary spiral.
While the developed world has been desperately attempting to fend off the first inflation outbreak in more than 30 years, China has the opposite problem.
Producer prices have been in reverse for more than a year, a phenomenon that now threatens to spill over into consumer prices.
The Consumer Price Index slipped 0.3 per cent in October, month on month, rising just 0.3 per cent since the same month a year ago.
UBS reckons this will knock a significant hole in China’s growth projections and will certainly lose more US market share following its hit during the previous Trump regime although it did manage to find alternative markets, as the graph below illustrates.
China’s share in US imports has been declining since tariffs were imposed by the previous Trump administration. (Source: CEIC and UBS)
While China’s share of American trade dropped, it maintained its share of global trade as it shifted focus.
That may not be so easy this time as the threatened widening of the trade war is on a much grander scale than 2018 and is likely to have far wider impacts.
In anticipation of the tariffs, American companies operating in China have slowed their capital investment plans during the past year and now are likely to put them on hold, which has exacerbated China’s broader economic slowdown.
“This time, we think it could also lead to significant closing of businesses and loss of jobs, according to UBS Evidence Lab survey.
“If the Trump administration also imposes broad tariff hikes on other countries, and tightens tech and investment restrictions on China further, the negative impact could be larger,” they said.
What comes next?
Beijing is now expected to continue rolling out stimulus measures as needed until greater clarity emerges over Trump’s longer term plans.
Morgan Stanley economists have taken heart that the measures announced to date have kept iron ore prices elevated and that there are early signs the property meltdown could be stabilising.
It continues to worsen, but at a slower pace.
But they agree more is needed.
“Our economists think fiscal support is likely to remain supply-side centric initially, and could also be likely shaped by the scale and timing of potential US tariffs,” they said.
In the past week, Chinese officials have hinted that major stimulus plans may be afoot, given China’s government debt levels are well below those of Japan and the US.
If history is any guide, that would involve further splurges on big new infrastructure projects that would soak up the resources Australia produces.
The biggest hole in China’s economy, however, is its lack of consumer spending.
With an aging population, a birthrate that ensures population decline and little in the way of a retirement system, most Chinese save rather than spend.
UBS believes the government may use some of its upcoming stimulus to fire up domestic demand in an effort to reduce reliance on exports.
“We expect the government to expand subsidies to the household sector, including the expansion of the trade-in scheme for consumer goods, increased spending on social safety net including subsidies to unemployed, and subsidies for childbirth and childcare,” they said.
In the past, US president Donald Trump has accused China of deflating its currency to boost exports. (Reuters: Stringer)
Deflating currency, flooding exports
China’s currency, meanwhile, continues to devalue, particularly against the US dollar.
In the past, that has angered Trump who has accused Beijing of deliberately driving down the value of the renminbi to improve its global competitiveness.
More recently, it has flooded global markets with excess steel that otherwise would have been used for high rise property construction.
In the meantime, it has little option but to further lower interest rates in a bid to boost consumer spending and help arrest the real estate crunch, retaliate with tariffs against American goods and continue to search for new markets.
It is possible that China may flood the US market with goods in the next three to six months in an effort to land as much as possible before the tariffs are imposed.
After that, it may well look to other markets to offload its goods, like Australia.
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