What is the China-US endgame?

US-China trade conflict is inevitable according to ANZ Research.

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The trade imbalance between China and the US stems from the US dollar’s global reserve currency status and import tariffs cannot alleviate that situation.

" Although China sees the dispute to be mainly trade issues, the US is concerned about China’s tech supportive policy and intellectual property rights protection.”

Only if the US is willing to sacrifice the USD’s dominance or the world shifts to an RMB regime will economic order be restored.

What is clear is the trade disputes reflect fundamental differences between the US and China.

While the US adopts a unilateral approach, China advocates multilateral platforms such as the World Trade Organisation (WTO). But the United States Trade Representative (USTR) has questioned China’s WTO commitments for many years.

Although China sees the dispute to be mainly trade issues, the US is concerned about China’s tech supportive policy and intellectual property rights protection. The US (and allies) do not welcome China’s overseas acquisitions and 5G initiatives, citing national security issues. China views this as a policy of containment and a challenge to its national dignity.

Hurting global supply chains

Exports to the US represent 22 per cent of China’s total exports and 2.7 per cent of GDP. ANZ Research expects a 25 per cent increase in tariffs on Chinese goods to cause a 20 per cent decline in shipments, detracting 0.5 percentage points from China’s gross domestic product (GDP).

President Trump has threatened to expand tariffs to all Chinese goods which are mostly consumer electronics products, including mobile phones and laptops.

Global electronics supply chains have been disrupted and manufacturers will begin to accelerate shifts in production away from China to places like Southeast Asia, especially for low margin, unsophisticated products.

US buyers have also likely suffered from higher prices due to import tariffs in 2018, according to US-based economists.

Deadlock until 2020

The current US administration is unlikely to soften its stance while at the same time China will employ retaliatory moves. Both parties do not view each other to be trustworthy so the lack of a resolution will continue to drive market volatility through 2020.

China believes its GDP growth target to be attainable with the aid of stimulus, even if the US expands its tariffs to include all Chinese goods. In the meantime, the US Federal Reserve Bank will monitor the impact on US inflation, stock market volatility and ultimately the growth outlook.

The impact of increased tariffs in 2019 will be bigger as exporters have already frontloaded some shipments in 2018, resulting in a larger contraction of China’s exports this year. Poor market sentiment has also hurt domestic consumption and investment. Successive stimulus measures are needed to boost sentiment.

Boosting domestic demand

To maintain financial stability, China will not devalue the currency. Counter-cyclical adjustment and macroprudential measures can help smooth foreign exchange volatility.

The State Council will launch more tax cuts, infrastructure investments and consumer subsidies as the 6.0-6.5 per cent growth target is held to be binding.

The People’s Bank of China will manage market liquidity via targeted reserve requirement cuts, medium-term lending facilities and open market operations. It can also launch innovative measures to support credit for small to medium-sized enterprises but interest rate cuts and quantitative easing are very unlikely.

Ultimately, China will employ proactive fiscal, industrial and targeted credit policies to avoid financial instability and property bubbles.

Raymond Yeung is Chief Economist, Greater China and Betty Wang is Senior China Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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