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China’s Economic Response to Trade Tensions

 

In response to rising trade tensions, China has outlined a series of economic measures aimed at countering the impact of potential US tariff hikes, particularly as Donald Trump returns to the presidency. The country’s top leaders, during the annual Central Economic Work Conference (CEWC) held from December 11-12, pledged to adopt a more aggressive fiscal and monetary stance to maintain steady economic growth despite ongoing challenges.

The CEWC’s readout, broadcast by state media, highlighted China’s intention to increase the budget deficit, borrow more, and ease monetary policies as it prepares for further trade conflicts with the United States. National broadcaster CCTV emphasized the growing adverse impact from external factors, signaling China’s heightened concern over the economic fallout from the trade war. This year’s meeting occurs against the backdrop of a sluggish economy, hindered by a severe property market crisis, mounting local government debt, and weak domestic demand. Exports, traditionally a key growth engine for China, now face the looming threat of higher tariffs under Trump’s administration.

A separate announcement from Xinhua reiterated China’s commitment to stabilizing its currency exchange rate, keeping it at a “reasonable and balanced level.” This signals Beijing’s intent to prevent currency volatility amid potential trade disruptions. The CEWC’s pledges align with China’s shift towards a more dovish economic stance, emphasizing growth over immediate financial stability. This shift in tone reflects a significant departure from previous, more cautious policies, and suggests that China is willing to embrace a higher risk approach to safeguard its economic future.

The meeting also revealed intentions to implement more proactive fiscal measures, including a higher budget deficit, increased debt issuance at both central and local levels, and a commitment to reducing bank reserve requirements. Moreover, officials signaled that interest rates would be cut “in a timely manner” to stimulate the economy. These measures aim to offset the negative effects of the trade tensions and support growth in the face of uncertain global trade dynamics. However, economists like Zhiwei Zhang from Pinpoint Asset Management have pointed out that the magnitude of these measures will depend on the specifics of the US tariff announcements.

The CEWC’s emphasis on stimulating growth rather than focusing solely on financial risks indicates China’s strategy to prioritize economic stability. The government has not set a specific target for growth in 2025, but analysts suggest that maintaining a growth rate of 5% will be increasingly challenging, especially with the added pressure of Trump’s tariff threats. Economic experts such as Xu Tianchen of the Economist Intelligence Unit predict that a well-executed stimulus package could prevent a significant downturn, though growth may fall below 5%.

Tariff concerns are especially pressing for China’s manufacturing sector, which exports over $400 billion in goods to the US annually. The imposition of higher tariffs could further erode profits, dampen investment, and contribute to rising unemployment. With export growth at risk, China is looking to internal sources for economic stimulation. However, weak household demand, exacerbated by falling property values and limited social welfare, presents a serious challenge.

In response, the CEWC has called for measures to boost consumption, including expanding subsidies for durable goods such as cars and appliances, as well as raising pensions. The government aims to increase household incomes and “vigorously boost consumption” to stabilize domestic demand. Economists, such as Lynn Song from ING, see this focus on consumption as a positive step, offering hope for economic resilience despite the external pressures.

Dec 17, 2024Editor Team
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