Goldman sees slightly easier China monetary policy amid trade tiff with US

Goldman Sachs said it expected China to adopt a slightly easier monetary stance in the face of tit-for-tat tariffs between Beijing and Washington that, while likely to have limited immediate impact on the economy, were at risk of escalating.

On Friday, the Trump administration imposed tariffs on US$50 billion of imports from China, a move that came on top of hefty duties on steel and aluminium imports implemented at the start of June.

China retaliated swiftly by announcing reciprocal tariffs on US products, ranging from soybeans and autos to seafood.

Goldman Sachs analysts forecast that the negative growth impact on China of the tariffs would be 10-20 basis points of gross domestic product (GDP), while the effects on Chinese consumer price index (CPI) inflation would be “modest, on the order of 10-20 basis points”.

Goldman has forecast China’s gross domestic product growth to be 6.6 per cent this year.

Last week, it said it expected inflation to remain “mild” in coming months after the May CPI number came in unchanged at 1.8 per cent year-on-year.

“The tariffs announced thus far should have relatively small macro effects, but there is clearly a risk of further escalation,” its analysts wrote in a note late Sunday.

Goldman also adjusted its forecasts for the reserve requirement ratio in China and the rate on the country’s 7-day reverse repurchase agreements, the tool of choice for the central bank in managing interbank liquidity, reflecting “an expectation of slightly easier policy going forward”, they wrote.

The investment bank lowered its forecast for the 7-day repo rate to 2.75 per cent from 3 per cent at year-end, and said it expected the People’s Bank of China to cut the reserve requirement ratio by 50 basis points per quarter for the rest of the year.

In April, the PBOC unexpectedly cut the RRR by 100 basis points to 16 per cent for large institutions and 14 per cent for smaller banks.

The tariffs are scheduled to take effect in July, leaving some room for discussions to head them off.

But Wang Jun, the Beijingbased chief economist at Zhongyuan Bank, thinks China and the United States have entered a ‘talk and fight’ era in which trade frictions will become normal and the impact will be unavoidable.

“We are likely to see a cold war from economics to other areas,” he said.

“We should be ready for sustained conflict and long-term frictions and manoeuvring between the two countries.” — Reuters

Goldman Sachs said it expected China to adopt a slightly easier monetary stance in the face of tit-for-tat tariffs between Beijing and Washington that, while likely to have limited immediate impact on the economy, were at risk of escalating. — Reuters...