China is likely to feel the effect of the recent trade measures sooner than later because domestic investment is currently historically weak, credit momentum restrained, and authorities, as yet, have not shown a willingness to pro-actively stoke activity as they have in the past, according to Elliot Clarke, Research Analyst at Westpac.
“This policy stance can change, but only if it needs to. Admittedly part of the reason Chinese policy makers are remaining relatively passive on the domestic economy is that China is currently receiving the benefit of a weaker currency, thanks to the US dollar’s strength.”
“Market sentiment has pushed USD/CNY about 10% above its 52 week low, offsetting much of the tariffs’ cost to date, and aiding China’s competitiveness. China’s trade opportunities will grow further if they continue to lessen trade barriers with the rest of the world. On this point, Chinese Premier Li Keqiang has announced China is intending to reduce the average tariff rate for a majority of countries, and there have been reports in the press that this could occur as soon as October.”
“For the US, the effect of the tariffs will be felt later, likely mid-to-late 2019. At that time, the tailwind of fiscal policy will be winding down, and the US dollar will have further reduced the US’ trade competitiveness. Thereafter, there is a risk that these tariffs take US growth below trend.”