China-US trade tensions to have limited impact on China’s economy – Nomura

According to analysts at Nomura, the direct impact of the US import tariff hikes on China’s growth may be limited.

Key Quotes

“Given a 25% tariff on USD50bn of Chinese exports to the US and a potential 10% tariff on another USD200bn (total increased tariffs at USD32.5bn = USD50bn*25% + USD200bn*10%), Chinese exports subject to tariffs could be as high as USD250bn (USD50bn + USD200bn), which would comprise around 49-58% of 2017 annual exports to the US (Chinese exports to the US in 2017 totalled USD433bn according to China Custom’s statistics and USD506bn according to the US government statistics).”

“However, relative to China’s total exports (USD2.26trn) and nominal GDP (around USD12.25trn) in 2017, we estimate that the affected exports would equate to just around 11% of total exports and 2.0% of annual GDP, and the increased tariffs (USD32.5bn) would be much less, at 1.4% of total exports and 0.3% of GDP.”

“We also estimate the impact on China’s inflation would be quite small. The affected imports from the US (so far at USD50bn) account for 2.7% of China’s total imports (USD1.8trn in 2017), and a tariff hike of 25% on the USD50bn Chinese exports would equate to an average rise in overall import prices of 0.6pp.”

“A simple regression of historical data implies that a 1pp rise in import prices would correspond to a 0.4pp increase in PPI inflation and a 0.1pp increase in CPI inflation. Thus, the 0.6pp increase in import price inflation could lead to a 0.2pp increase in PPI inflation and a 0.1pp increase in CPI inflation; suggesting any inflationary pressures from the tariff hike would be minor.”

“The indirect impact could be significantly bigger  

Although the direct impact on China’s growth from the US tariff could be quite small, there may be a bigger indirect impact via rising uncertainty, especially when considering mounting domestic challenges (more credit defaults, a problematic property sector, overloaded debt, and reforms urgently needed).

Moreover, rising trade tensions may seep into investment, as exporters, including those multinationals, could shift their factories to other countries to avert the tariff. Consequently, in the medium- to long-term, if China-US trade tensions sustain over the long term, China’s growth would likely be hit beyond the scale that those trade data would indicate.”