Trade war: China’s worst case is very, very bad
● In China, economic growth could tumble, debt surge and foreign companies flee in a deepening trade war, economists warned as they pondered worst-case scenarios in a week of escalating tensions.
Bank of America, Morgan Stanley and UBS Group said China’s expansion may slow below 6% under such a scenario for the first time in almost three decades. The 5.8% pace predicted by Greater China chief economist Helen Qiao at Bank of America would create “a more dire growth environment than the number suggests”.
Analysts are assessing the damage to China’s role as the world’s supply hub as tariffs drive manufacturers overseas. They’re also warning of spiralling of debt that’s already closing on 300% of output as the government cushions the blow with additional spending.
Fresh curbs on Huawei Technologies’ access to the US market and US suppliers underscore the threat of economic containment that China is having to contend with.
“The potential long-term cost is huge,” said Larry Hu, chief China economist at Macquarie Securities in Hong Kong. “They must know that Japan fell into the lost decade partly because the Bank of Japan overstimulated the Japanese economy after the Plaza Accord.”
The escalating clash with the US is exacerbating existing economic judders, with data released this week showing Chinese expansion lost momentum in April even before US President Donald Trump raised additional tariffs on $200bn (R2.87-trillion) of Chinese imports from 10% to 25%.
The weakness raises the stakes for China’s President Xi Jinping to avert a prolonged economic confrontation at a possible meeting with Trump at the Group of 20 summit in Japan next month.
The economy is set for a bumpy ride in the short term, with the additional tariffs shaving off 0.3 percentage points this year, according to economists surveyed by Bloomberg News. An additional 0.6 percentage points will be sliced off expansion in the year after all goods are hit by US tariffs — as Trump threatens from June.
A full-blown escalation with blanket 25% tariffs imposed by both sides would push China’s growth below the lower bound of this year’s 6%-6.5% target by the second half of 2019, and to 5.5% next year, according to Morgan Stanley.
Citigroup said it sees the cumulative impact of US tariffs eliminating as many as 4.4million jobs, even before Trump slaps tariffs on those remaining $300bn of Chinese exports.
“The outlook is bleak,” said Chen Long, an economist at research firm Gavekal Dragonomics in Beijing. “Equities are likely to correct further, potentially wiping out most of the market’s year-to-date gains. Bond yields will fall again, after the recent pick-up. And the renminbi [yuan] is likely to soften.”
Xi is poised to deliver the stimulus needed to prevent a steeper growth plunge, likely causing debt to rise more sharply after a twoyear campaign to rein it in. As debt climbs, that may reignite concerns over systemic financial risks.
It is the potential for longer-term damage to China’s economic model, though, that most concerns economists should Xi become embroiled in a protracted economic war.
US tariffs on Chinese products have already set in motion a profound shift in global supply chains that won’t be easily reversed. That threatens to accelerate the departure of manufacturers that already are reeling from rising labour and other costs.
Japanese office equipment maker Ricoh said on Thursday it is moving some production from China to Thailand to avoid trade war risks and Taiwan’s Kenda Rubber Industrial is investing in Vietnam for the same reason. Samsonite International, Macy’s and Fossil Group have all said recently that they are continuing to move production and sourcing out of China.
“Both foreign multinational companies and Chinese private enterprises are more actively seeking alternative manufacturing bases,” said Klaus Baader, global chief economist at Societe Generale. “A lower trend growth in investment, coupled with more restricted access to foreign know-how, would mean permanent damage to longterm productivity growth.”
Restrictions on Chinese investment in the US, especially in technology-related areas, risk stalling the transfer of technologies and foreign know-how, slowing China’s move up the value chain, said Zhuang Bo, chief China economist in Beijing at research firm TS Lombard.
Even worse may await should Trump add export tariffs or ban shipments of key technology components to China, especially semiconductors, said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis in Hong Kong. That would strangle the Chinese economy, she said.
Altogether, an economic war with the US “blows China up”, said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong.
“China would be cut off from Western markets, ideas, technology, and US dollarflow long, long before it’s ready to replace the US for real.”