China - More US tariffs, more support
US raises China tariffs by another 10%; Beijing again retaliates immediately and targeted. Tariffs implemented still fit with base case assumptions, but more may come. Stepping up of support confirmed in annual work report to National People’s Congress. We also see upside risks to our 2025 growth forecasts despite tariffs.
US raises China tariffs by another 10%; Beijing again retaliates immediately and targeted
Yesterday, ostensibly for ‘fentanyl-related’ reasons, the US administration followed up on its threat announced in late February to raise import tariffs on China by another 10%, following a first 10% increase in early February (see our earlier report, ). Like in February, Beijing responded immediately, and in a measured, targeted way. Per 10 March, China will impose 15% tariffs on US imports of chicken, wheat, corn and cotton and 10% tariffs on soybean, pork, beef, fruits and milk products. In February, China had already imposed 15% import tariffs on LNG and coal imported from the US, and 10% on crude oil and agricultural equipment. Next to counter-tariffs, China also responded again with non-tariff measures. The Ministry of Commerce announced it would add ten (defense-related) US firms on the ‘unreliable entity list’ and place 15 US firms on an export control list. In February China put a few companies (including Google and the owner of Calvin Klein) under investigation, and widened export controls to the US with tungsten-related materials.
China’s response again looks measured and targeted, and is not fully proportional in terms of counter-tariffs. By picking certain agricultural products, Beijing aims to impact (sentiment in) US farm states, which form the traditional Trump fanbase, just before the planting of crops will kick off. China accounts for around 50% of US soybean exports and 30% of US cotton exports. By keeping retaliation constrained, it seems Beijing looks to leave the door open for negotiations, with president Trump having stated before he is willing to talk with president Xi on a potential deal.
Tariffs implemented still fit with base case assumptions, but more may come
Developments on the tariff front so far still fits within our base case, which assumes a gradual stepping up of China-specific import tariffs by the US to an average rate of 45% (we are currently at around 30%). That said, bear in mind that the additional 20% has been levied for ‘fentanyl-related’ reasons only. We could well have more China tariffs in April, when the US will present the results of studies into the trade relationship and trade policies versus China. Moreover, China could also be hit with future product-specific (non-country specific) tariffs announced by the US and/or reciprocal tariffs. At the same time, we have also experienced that US tariffs can be subject to deferral, backtracking and/or renegotiations.
Stepping up of support confirmed in annual work report to National People’s Congress
Earlier today, in line with tradition, Prime Minister Li Qiang presented the government’s annual work report – with key policy directions and economic targets for 2025 – to the national parliament (National People’s Congress) in Beijing. As expected, the government maintained the growth target at ‘around 5%’, for the third time in a row, despite developments on the tariff front. This went hand in hand with an increase of the nominal budget deficit target to 4% of GDP (from 3%), the highest level in more than thirty years. Moreover, the target for the issuance of local government bonds was put at record highs, while the issuance of special ultra-long sovereign was raised from last year. Part of the proceeds from the sovereign bond issuance will be used to fund consumer subsidies, a doubling of a similar program in 2024. In line with a previous announcement that ‘to comprehensively expand domestic demand’ was the key priority for 2025, ‘consumption’ was mentioned more often in the work report than ‘high-quality development’, last year’s buzzword. The report also included the plan to raise CNY 500bn of special sovereign debt to strengthen the capital position of major state and policy banks. Meanwhile, the inflation target was lowered from 3% to 2%. Li also confirmed that the PBoC will continue with easing monetary policy.
The policy proposals presented by Li are broadly in line with market expectations, including ours. We do not interpret the lowering of the inflation target as a hawkish signal, rather an adjustment to the reality of low inflationary pressures in China (CPI 0.5% y/y in January). We think the government on purpose kept the growth target unchanged despite the growing drags from US import tariffs, as it is committed to stepping up support and help restore confidence and an improvement in China-related market sentiment. Strikingly, although the growth target of around 5% was floating around for a while, consensus expectations for China’s growth rate in 2025 have been around 4.5% for months. Our 2025 growth forecast (4.3%) is a bit below consensus, which is related to our tariff view. We are keeping our growth forecasts unchanged for now, partly with a view to potential further tariff developments in the coming months.
We also see upside risks to our 2025 growth forecasts despite tariffs
We already noted in our recent , that sentiment recently improved somewhat on tech enthusiasm (DeepSeek’s breakthrough, Beijing’s more friendly stance towards job-creating internet platforms). The stock market has moved up in recent weeks, the yuan is holding quite steady despite tariffs (partly helped by PBoC actions), and China’s bond yield has risen by around 15bp from the historic lows seen at the start of this year. What is more, following stronger than expected lending data for January, and moderately positive spending data during the Lunar New Year break, the February PMIs published over the past few days suggest growth momentum is picking up again. The PMIs generally came in stronger than their January readings and beat consensus expectations, with particularly both manufacturing PMIs showing strong gains. All in all, despite remaining tariff threats, we also see upside risks to our growth forecasts, for instance if there is more evidence that Beijing’s support plans will prove effective in propping up demand and stabilising the property sector, and/or if the US and China will make a trade deal after initial tariff fireworks.