CHINA: Countermeasures to trade tensions with the United States: room for monetary easing and policy levers

The GDP has been recording its lowest growth rates in nearly three decades, but it is in line with the 6.7% average of the previous eight quarters (2nd quarter 2019: 6,2% y/y). The trade dispute with the USA continues which should impose new taxes of 10% on 300 Bio $ imports from China from September. However, China is far less exposed to a trade shock today than it ten years ago: in 2018, net exports were just 0.8% of GDP (2008: 7.5%). The Trump administration is trying to control the supply-chain of the tech giant Huawei by putting pressure on US leading suppliers of semiconductor chips, other components, and software. However, China might need less time as foreseen by the US-government to build a domestic chip and software industry in order to compensate possible US commercial restrictions.

To counter the tariff and trade measures taken by the US, further steps may be considered in addition to the tariffs already imposed on US imports: currency devaluation, restrictions in US companies producing in China and export restrictions on rare earth metals.

The government is encouraging local authorities to initiate new infrastructure projects. The People’s Bank of China supports its slowing economy by loosening minimum reserve rates and bolstering lending. For the first time in 11 years since the global financial crisis, it allowed the yuan to exceed 7 Yuan/$. A cheaper yuan helps China's exporters compete in the US and global markets, offsetting the impact of painful tariffs to some extent. On the other hand, a weaker yuan may endanger government efforts to support economic growth by stimulating domestic consumption, because consumers will have to pay more for imports. This could in turn have a negative effect on major exporters to China, such as Germany and USA.

September 2019