China to play waiting game as US trade pain worsens: Deutsche

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HONG KONG (Sept 5): Time may prove to be on China’s side as the trade war with the US escalates.

Tariffs already imposed on US$50 billion worth of Chinese products largely avoided consumer goods or those that are hard to source from other countries, shielding US shoppers from their direct impact. That’ll change if Donald Trump proceeds with threatened levies on another US$200 billion, as he is expected to do as soon as this week.

“As the scope of tariffs extends to more Chinese exports, the marginal side effects will likely rise for the US, and the marginal damage to China will likely decline,” Deutsche Bank AG economists Zhiwei Zhang and Yi Xiong wrote in a note dated Sept 4. They estimate the US$200 billion list has US$78 billion worth of consumer goods versus only US$3.7 billion in the US$50 billion list.

For China’s economy, the analysts lay out two scenarios:

  • If a trade deal cannot be reached (their baseline case), China will likely keep monetary policy loose, raise the fiscal deficit to boost infrastructure investment, and let the yuan depreciate to 7.4 in 2019 (it was trading around 6.83 mid-morning in Hong Kong). This scenario is positive for commodities.
  • If a trade deal is reached, China will likely bring the currency back to around 6.5 to the US dollar, buy more US agricultural and energy goods, open the service sector to foreign firms, and normalize monetary and fiscal policies to a neutral stance. This is a scenario positive for equities and negative for commodities as China wouldn’t need to boost infrastructure investment as much.

“China may follow a ‘wait and see’ strategy in the next few months before the US midterm election is over in November,” the economists wrote. “There is a good reason to follow such a strategy in our view: the trade war will likely become painful for the US soon as well.”

The Deutsche Bank economists expect China’s GDP growth will be 6.5% in the second half and slow to 6.3% in 2019, assuming there is no trade deal. If a trade agreement is reached in November, when the nation’s presidents are set to meet, the bank sees moderate upside risk to those forecasts.