China - Trump 2.0 versus more fiscal support

Republican clean sweep implies high likelihood of renewed US-China tariff war

The Republicans have not only gained the US presidency, but also a majority in the Senate, and are also likely to control the House. Trump will thus have a clear mandate to go ahead with his tariff agenda (also see our note, Republican sweep raises risks to the outlook). Regarding China, Trump would likely not even need such majorities: in 2018 he used the presidential powers under Section 301 of the 1974 US Trade Act to install specific tariffs on China. Hence, although there are still many uncertainties to what extent Trump will follow through on all of his pre-elections tariff announcements, there is a relatively high likelihood that he will come with new China tariffs. Other measures such as a further tightening of export controls and investment restrictions beyond the current ‘High Fence, Small Yard’ strategy are also on the table.

Regarding tariffs, it remains to be seen how broad the coverage will be, and whether they will indeed be (close to) 60%. During his first tariff war with China in 2018-19, Trump raised tariffs up to 25% on in total USD 300 bn of goods (±55% of 2018 imports from China). The Biden administration has kept these tariffs in place, and raised tariffs this year for a few strategic products like EVs (to 100%) and semiconductors (to 50%). Trump’s first tariff war was followed by a 20% drop of US imports from China in 2019-2020 (also reflecting the impact of the pandemic), but there was a clear rebound in 2021-2022. A broad 60% tariff would likely have a much more devastating effect and would sharply accelerate a US-China decoupling.

Still, China is probably better prepared than in 2018-19 for a new tariff war. By trade diversification, Beijing has ensured it is less dependent on exports to the US or on crucial imports from the US compared to five years ago. China also has tools to respond to new tariffs, such as counter-tariffs. While China may likely not respond proportionally, it could target the ‘Trump base’ in rural areas by raising tariffs on agricultural products again. Other potential retaliation tools are blacklisting specific US companies, currency depreciation and the restriction of access to critical inputs such as rare earth. Given the potential impact of these countermeasures on US firms (including Musk’s Tesla) and Trump’s electorate, and the wider effects that high/ broad tariffs may have on US inflation (one of the key topics why Trump has beaten Harris), there is also a possibility that both countries after an initial escalation will start to work towards some kind of a deal, or a truce – similar to events in 2018-2019.

All in all, Trump’s re-election leads to a material rise in external risks and further drags to GDP growth, with three additional nuances. First, on the short-term, the threat of tariffs may lead to frontloading of trade, which could even benefit Chinese net exports and hence GDP growth. Second, China may be able to shift (part of its) exports to other destinations than the US. Third, experience with the first tariff war has shown that after a while trade is (partly) diverted through third countries like Vietnam or Mexico (see our China August Monthly coverage, A tale of Trump risks, tariffs and trade diversion).

More details on fiscal support announced: main focus on local governments so far

Today, the NPC Standing Committee provided further details on the fiscal support plans, complementing the stimulus package rolled out by the PBoC in September. Over the past weeks, the shape of fiscal support became more clear following announcements from the Politburo in late September and the National Development and Reform Commission, the Finance and Housing Ministers last month. However, confirmation of scale/timing had to be approved by the NPC Standing Committee. As we noted before, Beijing was likely to take into account the outcome of the US elections as well in this process, which explains the delay of this meeting to the first week of November.

Crucial angle in the fiscal support plans is to break negative feedback loops, by stabilising real estate and equity markets (also see our report China - Waiting for fiscal support numbers … and US elections). This should help restore confidence among consumers/homebuyers, producers, and investors, thereby stabilising domestic demand. Beijing tries to do this by alleviating the problems of local governments (so that they can better play their role in rolling out stimulus), strengthening the balance sheets of the largest state banks (to enable them to lend more), and reduce the financing problems of (state-owned) property developers (to enable them to finish construction projects). Direct consumption support looks limited so far (to the poorest, and to students), but this could be stepped up should downside risks (for instance from Trump tariffs) increase. Financing should take place via issuance of ultra-long central-government bonds and the stepping up of special local government bond issuance.

Today, following the conclusion of the Standing Committee meeting, China’s Finance Minister Lan Fo’an confirmed the following in a highly watched press meeting:

• Ceilings for local government debt will be raised to CNY 35.5 trn, which will allow local governments to issue CNY 6 trn (±EUR 777 bn) of additional bonds to swap off-balance sheet debt to new on-balance sheet debt. According to the Minister, these debt swaps would save local governments around CNY 600bn in interest payments over five years, which they can use to for support at the local level.

• New quota of CNY 4trn (EUR 518bn) allocated over five years through 2028 will be available for the issuance of special local government bonds.

• China will implement more forceful fiscal policies in 2025.

• The government is accelerating work on bank recapitalization.

Initial market reactions signal a disappointment over the plans communicated today. This likely stems from the fact that the plans only got concrete for the local government’s part. That said, taking into account today’s statements by the Finance Minister and earlier official remarks, we expect Beijing to work further on fiscal support measures in the coming weeks and months (with for instance the annual Central Economic Work Conference in mid-December a key possibility for further communications). It is likely that policy makers will also prepare for further (contingency) support should the risks from Trump tariffs materialize.

To conclude

The stepping up of fiscal stimulus is taking away some downside risks to our growth forecasts (particularly for 2025), but Trump’s re-election is adding to them. We are currently reviewing our forecasts for 2024 (4.9%) and 2025 (4.5%), and will publish potential revisions later this month.