China Likely to Retaliate against US Tariffs with Qualitative Measures

Two boats bearing Chinese, US flags
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China is very likely to take “qualitative” retaliation as its trade war with the US escalates.

The reason? China imports much less from the US than it exports, therefore retaliatory tariffs will not be enough to match those imposed by the US, said ING recently.

New tariffs—ranging from 10% to 25%— are expected soon on US$200 billion worth of imports from China and these will be in addition to the US$50 billion already in place.

Last month, China’s Ministry of Commerce—in response to the US’s tariffs on US$200 billion of Chinese goods— announced a $60 billion list of goods on which to impose tariffs ranging from 5% to 25%.

Together with the US’s previous tariffs on $50 billion of Chinese exports, this would mean nearly half of China’s exports to the US are covered by tariffs.

Last Friday, Trump doubled down on his threats to impose higher duties on Chinese goods, saying he’s ready to tax all imports at short notice.

Hours before Trump’s threats, China announced measures to support some of the exporters targeted by the higher duties. The Ministry of Finance said in a statement that it will raise export rebate rates for 397 goods, meaning that firms shipping such products abroad will pay less value-added tax. The new rates will be effective from Sep 15, according to the ministry.

“China is very likely to impose qualitative retaliation—such as obstacles that make it more difficult for US firms to compete in the Chinese markets—when the US imposes the next tariffs in order to fully match,” said Iris Pang, economist, Great China at ING.

The form that qualitative retaliation will take is uncertain, and how harsh these measures will be is also not known, she said, adding that qualitative retaliation is open-ended in nature, and could create much more uncertainty in the market than simple tariffs.

The Chinese response will depend on how far the US goes with its next round of tariffs, Pang noted.

Negative feedback from US companies could pressure the US government to trim the list of goods hit by tariffs, and lower the rate imposed, she said.

“In that case, China would not retaliate as harshly and the dynamic between the two sides might change for the better. This may lead to risks subsiding gradually,” she predicted.

China’s fiscal stimulus could rise to RMB 5 trillion in 2H18

China has put fiscal stimulus and monetary easing in place in order to offset the damage from trade war as much as possible, Pang pointed out, adding that the front end of the sovereign curve has fallen, suggesting that risks in the Chinese economy are rising.

Chinese sovereign yield curve (provided by ING)

The State Council announced a RMB 2.6 trillion fiscal stimulus package in August, and has also requested that local governments prepare a pool of backup infrastructure investment projects.

Fiscal stimulus could increase to RMB 5 trillion in 2H18 with another RMB5 trillion in 1H19,  particularly if this has to offset the negative impact from the full $200 billion in added tariffs should the US carry out its threats in full, Pang said.

For China’s leaders, keeping manufacturing activities stable so that jobs are secured is a key priority, she added.

In addition, the People’s Bank of China has eased liquidity and guided interest rates lower.

Liquidity is ample, with a net injection of RMB 195.5 billion from the Medium Lending Faciities in August, Pang pointed out.

“The three-month SHIBOR has fallen from 4.155% at the end of June to 2.878% on Sep 4,” she said. “We expect a targeted required reserve ratio (RRR) cut of 50 bps in October in order to direct liquidity to smaller enterprises and so avoid a liquidity crunch as the export environment deteriorates.”

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