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1 August 2018
Yao Yuan
China
The US Bureau of Trade Representations announced in mid-July its intention to impose a 10% tariff on Chinese imports of 39 worth $ 200 billion. Sino-US trade friction has warmed again, affecting the performance of the continental stock market and the renminbi. As business risks continue to rise and pressures for domestic growth increase, we expect China to start from three aspects and adjust macroeconomic policies to address them.
In terms of trade, in the face of the continuous advancement of the US government, Beijing should not show weakness. Once the United States has implemented the final tariff schedule, the central government will "prove itself" and counterattack by retaliating. Although China's total merchandise purchases from the United States last year were only $ 130 billion and imports were not significant, the authorities could impose tax rates above 10%.
Trade Disputes Spread Around the World
If this happens, the US economy will be affected. Even if China does not take revenge, the new series of US tariffs is not good for itself. According to Chinese Customs statistics, about 70% of the top 100 Chinese companies that trade with the United States come from overseas, while US companies also account for more than 10%. In other words, China has established a strong position in the global supply chain and Sino-US trade disputes will be spreading around the world.
The continued risk of trade, the slowdown in exports and the downward pressure on domestic growth, the mainland authorities will actively adjust domestic policies. In early July, the People's Bank of China began implementing "targeted RRR cuts" to free funds in the market to mitigate deleveraging liquidity risks and new badet management laws. Since then, the authorities seem to be progressively loosening policies on the regulation of wealth management products, the fight against pollution and deleveraging.
There will be no complete relaxation of the policy
At the same time, Beijing also sent prosecutors to check the financial situation of the local government. Unlike previous years, the prosecution team found that local government spending has not exceeded budget targets so far. Not only does the central government have no deficit, but it records a surplus of nearly 400 billion yuan. The authorities have strengthened the supervision of local government finances while tightening public-private partnership (PPP) projects, which has led to a decline in investment in infrastructure. If the economy faces further downside risks, Beijing should expand its financial support.
However, Beijing continues to view management risk as a political priority, especially to de-lever and restructure local government finances. Therefore, even if the authorities can introduce monetary and fiscal stimulus measures, they will not inject large amounts of liquidity into the market and will not restart the construction of large-scale infrastructure, so not compensate for previous work. Unless the domestic situation deteriorates to pose a threat to the entire system, we expect that Beijing will continue to adhere to the policy of policy adjustment rather than the policy. 39, completely relax the policy.
Promoting Structural Reforms
Finally, mainland China will further open markets and economies to develop trade partnerships and consolidate domestic demand. Find positive news of the Sino-US trade war, it is inevitably push China to accelerate the reform of its economic structure. Recent events (such as the US ban on the sale of ZTE (00763) earlier) have revealed China's deadly wounds in the development of science and technology, prompting domestic companies to catch up. The Administration can promote economic rebalancing in favor of a technology-driven growth model by increasing budget spending and strengthening the protection of intellectual property rights.
On the external front, the Beijing authorities have also accelerated the pace of market liberalization. At a time when the United States is maintaining protectionism, China has actively strengthened its contacts with the outside world, including by opening up the domestic financial system, reducing tariffs, and easing regulatory restrictions. foreign direct investment. Ironically, the latest data show that US FDI in China climbed nearly 30% from one year to the next in June. This means that some US companies (like Tesla) could avoid Trump's tariffs by increasing their investment in China. It is true that the Sino-US trade dispute is undoubtedly unfavorable to the global development of world trade, but as the Chinese economy is transformed into domestic consumption and technological growth, if the authorities seize the opportunity to manage it cautiously, it will turn the crisis into opportunity.
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