Analysts at Standard Chartered point out that the US-China trade negotiations have suffered a serious setback after the US decided to raise tariffs on USD 200bn of Chinese imports from 10% to 25%, effective 1 June.
“On 13 May, China announced a “forced retaliation” plan to raise tariffs on USD 60bn of US imports to 25% from 5-10%, also effective 1 June. Given that both countries are committed to continuing trade talks, a deal remains likely at the G20 Japan Summit on 28-29 June. However, the heightened risk of a breakdown in the trade talks does not appear to be fully appreciated by the markets.”
“The US is also planning to impose 25% tariffs on its remaining imports from China, valued at USD 300bn. This could drive a decline of up to 40% y/y in China’s annual exports to the US.”
“Given that the US accounts for 3% of China’s GDP, we estimate that this would reduce China’s GDP growth by 1.2ppt. Manufacturing of furniture, computer, electronic and optical products, and textiles would likely be most affected.”
“We think China could still achieve its GDP growth target of 6-6.5% for 2019 even if 25% US tariffs are applied to all of its exports to the US. China’s proactive fiscal policy for 2019 was designed to prepare for possible setbacks in US-China trade talks.”
“If economic conditions worsen more than expected, Beijing could roll out further easing measures, including subsidising retail sales, scaling back housing-market tightening measures, or cutting benchmark interest rates (not our base-case scenario). Chinese yuan (CNY) depreciation is unlikely to be used as a stimulus tool, as this could backfire and destabilise domestic financial markets.”