China is likely to respond with tariffs and policy easing – Standard Chartered

Standard Chartered analysts note that the US President Trump said on 1 August that the US will impose 10% punitive tariffs on another USD 300bn of Chinese imports, effective 1 September.

Key Quotes

“We await reactions from China. China has imposed up to 25% tariffs on a total USD 110bn of US imports, as retaliatory measures to the 25% US tariffs already in effect on USD 250bn of Chinese imports. The commitment that China made earlier this week to ramp up buying of US agricultural exports is now clearly at risk. There is very little room for China to further expand its retaliatory tariffs beyond USD 110bn as it is already close to China’s annual imports from the US. However, China could selectively raise tariffs to 25% or beyond on certain US products.”

“We expect the new 10% tariffs on USD 300bn of Chinese imports to potentially shave 0.3ppt off China’s annual GDP growth. Taking into account previous tariffs already in place, US tariffs (10-25%) on a total USD 550bn of Chinese imports could slow China’s annual GDP growth by about 0.9ppt, in our view. If the 10% tariffs on USD 300bn of Chinese imports is further raised to 25%, as indicated by Trump in his tweets (that is the US imposes 25% on USD 550bn of Chinese imports), the negative impact on China’s annual GDP growth would increase from 0.9ppt to 1.2ppt.”

“We believe China can still achieve its GDP growth target of 6-6.5% for 2019. The economy expanded 6.3% y/y in H1. While exports are likely to slow in H2, policy-backed consumption and investment should be able to offset most of the negative impact. Nevertheless, a further escalation of the US-China trade conflict poses downside risks to our China GDP growth forecast of 6.5% for 2019.”

“The new tariffs from the US reinforce our view that China’s policy makers will maintain a pro-growth bias in H2, fully implementing the planned budget deficit of 6.5% of GDP in 2019.”