With Donald Trump’s recent win in the U.S. presidential election, global financial markets have reacted strongly, and his proposed trade policies are poised to have far-reaching implications. Trump’s potential tariffs could hit 60% or more on imports from China—a drastic increase from previous tariff levels, which already posed significant challenges to Chinese exports. This scenario has heightened expectations for China’s fiscal and monetary authorities to enact fresh stimulus measures aimed at stabilizing its economy in anticipation of reduced trade flows.

The looming tariffs threaten to strike at a critical moment for China, as the country grapples with a sluggish real estate sector and dampened consumer spending. China’s policymakers, keen to sustain economic growth, are now looking at an expanded package of stimulus measures that could come as early as this week.

Rising Challenges for China’s Export-Driven Economy

China’s economic growth has long been underpinned by its strong export sector. With exports accounting for about 20% of China’s GDP, any disruption in trade flows due to tariffs can have a profound impact on the economy. Trump’s proposed tariffs could reduce China’s exports to the U.S. by as much as $200 billion, resulting in a drag on GDP growth of about one percentage point, according to Zhu Baoliang, a former chief economist at China’s economic planning agency.

The U.S. has historically been one of China’s largest trading partners, and any additional tariffs could stifle the demand for Chinese goods, exacerbate supply chain disruptions, and compel businesses to explore alternative markets. Many Chinese companies have already been hit by lower demand from the U.S., and the anticipated increase in tariffs would deepen these losses.

“The U.S. has been a vital partner in the Chinese export landscape,” Zhu said. “Losing a significant portion of that market due to high tariffs could result in a challenging economic adjustment period for many Chinese exporters, potentially leading to layoffs and production cuts.”

The Stimulus Response: What China’s Package Might Look Like

In response to Trump’s tariff threats, analysts expect China to roll out a new stimulus package aimed at offsetting the anticipated trade and economic losses. The Economist Intelligence Unit’s principal economist, Yue Su, predicts that China may introduce a stimulus package exceeding 10 trillion yuan (about $1.39 trillion USD). According to Su, roughly 6 trillion yuan could be allocated for local government debt restructuring and bank recapitalization, while the remaining 4 trillion yuan could support infrastructure development and social programs in the real estate and manufacturing sectors.

China’s fiscal stimulus could include:

1. Local Government Debt Swaps and Bank Recapitalization: These measures aim to ease the debt burden on local governments, enabling them to take on more projects without facing significant fiscal strain. The recapitalization of banks would ensure that financial institutions remain stable and capable of lending to businesses impacted by tariff shocks.
2. Special Bonds for Infrastructure and Real Estate Support: To counteract the real estate market slump, China may issue special bonds that would support housing and infrastructure developments. Such measures could not only stimulate domestic demand but also create jobs in construction and related sectors.
3. Incentives for High-Tech Manufacturing: Following years of trade tensions with the U.S., China has prioritized technological self-sufficiency. By providing financial support for high-tech and innovation-driven sectors, China aims to reduce its reliance on U.S. technologies and create a more resilient industrial base.

China has already been supporting its manufacturing sector through loans and tax breaks, especially in areas such as artificial intelligence, telecommunications, and green energy. As U.S. export controls have limited China’s access to certain technology products, these stimulus measures would align with China’s broader ambitions of bolstering domestic tech development.

Economic Diversification: Shifting Exports Beyond the U.S.

Despite escalating tariffs and trade barriers, China has been diversifying its export markets. The U.S. once accounted for nearly 18% of China’s total exports; by 2023, however, this share dropped below 15% as China increased its exports to the Association of Southeast Asian Nations (ASEAN) and other trading partners.

Francoise Huang, a senior economist at Allianz Trade, noted that China’s export landscape has significantly shifted over the past decade. “While China has lost market share in the U.S., it’s clearly been gaining in other places,” Huang said. ASEAN countries now account for over 25% of China’s exports, compared to less than 18% in the early 2010s. This trend is a testament to China’s success in tapping into other regions to compensate for declining exports to the U.S.

China’s trade relations with emerging markets have also deepened as many developing economies turn to Chinese goods and services. The country has made strategic trade agreements with countries in Africa, Latin America, and the Middle East, with exports to these regions increasing year by year.

Stock Market Reactions: Mixed Performance Reflects Uncertainty

Following Trump’s victory, stock markets around the world reacted with contrasting movements. Mainland China and Hong Kong stocks declined in the immediate aftermath of the election news, as investors digested the potential implications of further U.S.-China trade frictions. In contrast, U.S. markets soared, with major indices reaching record highs.

This divergence reflects a high degree of uncertainty in China’s economic outlook. While the Chinese stock market may face near-term volatility, some analysts believe the anticipated stimulus measures will help stabilize markets over the long term.

Liqian Ren, director of quantitative investment at WisdomTree, said that China’s stimulus measures are likely to be bigger than previously anticipated due to Trump’s tariff threats. Ren estimates that Beijing could introduce an additional 2-3 trillion yuan in stimulus annually to counteract the expected economic pressures. However, she warned that uncertainties around Trump’s policies mean the actual scale of support remains difficult to predict.

Geopolitical Tensions and Technology Controls

During Trump’s first term, U.S.-China tensions extended beyond tariffs, with U.S. export controls on Chinese tech firms becoming a major flashpoint. Trump placed telecommunications giant Huawei on a blacklist that restricted its access to U.S. suppliers. The Biden administration expanded these controls by limiting Chinese access to advanced semiconductors and pressuring U.S. allies to implement similar restrictions.

Experts predict that Trump’s return to office will lead to a continuation, if not an intensification, of such restrictions. Both Democrats and Republicans have supported stringent export controls, citing national security concerns. Chris Miller, author of “Chip War,” notes that the U.S. is likely to maintain its restrictive stance on tech exports to China, regardless of who holds office.

Implications for U.S.-China Trade Relations

The potential for increased tariffs and technology controls poses significant challenges to U.S.-China trade relations. A Republican-led Senate, as projected by NBC News, could further support protectionist measures, complicating prospects for cooperation between the world’s two largest economies. Some analysts warn that the next few years could see a prolonged period of economic decoupling as each side fortifies its domestic industries.

If the Republican Party gains a majority in Congress, the chances of new trade restrictions and tariffs are high. “Protectionist measures could be accelerated, amplifying impacts on the global economy and presenting significant downside risks,” Yue Su commented.

China’s Growing Influence in Global Trade

Even with new tariffs, China’s global trade influence remains substantial. Beyond its export shifts to ASEAN countries, China has also deepened its role in global supply chains, particularly in sectors like electronics and heavy industry. According to a recent Federal Reserve report, Chinese exports have increasingly gone to intermediary countries that assemble products for the U.S. market, mitigating some of the effects of tariffs.

What Lies Ahead

As Trump’s policies threaten to reshape U.S.-China trade dynamics once again, China’s economic planners are working on strategies to bolster domestic resilience. From local government debt restructuring to high-tech incentives, China’s anticipated stimulus package aims to buffer the economy against external shocks while supporting long-term development goals.

For China, the challenge will be navigating an increasingly hostile trade environment while maintaining growth. Its capacity to diversify export markets, increase self-sufficiency in technology, and enact effective stimulus measures will be crucial in weathering the coming changes. If the proposed tariffs come to fruition, the effects will ripple across not only China but the entire global economy, underscoring the profound impact of U.S.-China relations on world trade.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

7th November, 2024