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China shrugs off warnings that trade war with US could slash economic growth

Chinese officials are shrugging off warnings that the trade spat with the United States could slash the country’s economic growth, with state-run media saying Beijing can “outlast” the tariffs war.

Donald Trump this week announced another $200 billion worth of goods on which to foist levies for his latest volley in the stand-off between the world’s top two economies, and threatened there could be more in the pipeline if China doesn’t play ball.

china us trade

This photo taken on April 8, 2018 shows workers stand in line next to a container ship at a port in Qingdao in China’s eastern Shandong province. Photo: AFP.

But while Chinese Premier Li Keqiang acknowledged on Wednesday that the country is facing “greater difficulties” in maintaining steady growth in the face of the US onslaught, he quickly voiced confidence in its ability to “overcome obstacles”.

The new measures add to the $50 billion worth of goods already targeted. That amounts to about half China’s exports to the US, which generate roughly 1.3 percent of its gross domestic product, said Mark Williams, chief China economist at Capital Economics.

According to the rating agency Moody’s, this new escalation could cut as much as 0.5 percentage points from Chinese economic growth next year.

The row comes at a tough time for Beijing, which has seen the world’s number two economy run out of steam of late, hit by the government’s efforts to tackle a mountain of debt, which led to a tightening of credit and a sharp decline in infrastructure investment.

Li Keqiang

Premier of the People’s Republic of China Li Keqiang. File photo: Kremlin.

The International Monetary Fund predicted in April that growth would slow to 6.4 percent in 2019, against 6.9 percent in 2017.

But if Trump executes his threat to tax all imports from China, Beijing could see that figure fall to 5.8 percent next year, warned Louis Kuijs, chief Asia economist at Oxford Economics. That would be the slowest rate since 1990, the year after the Tiananmen Square protests.

‘Few alternatives’

While there are hopes the two sides will be able to resolve their difference, Kuijs warned the prospects for a deal remain low in the short term, with the White House appearing certain it can win the war.

However, Beijing has so far weathered the tariffs storm partly thanks to a sharp depreciation of the yuan, which has lost almost a tenth of its value against the dollar since April, offsetting the impact of tariffs, Capital Economics’ Williams said in a note.

Secondly, he added that US companies will stay dependent on Chinese suppliers, because “for many of the affected goods, there are few alternative suppliers”.

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For the types of items taxed by Washington, China is on average the source of half the goods, he said.

Authorities are also expected to take more measures to boost domestic demand, such as lowering income taxes, increasing export-tax rebates, financing more infrastructure, and encouraging banks to expand lending, according to Oxford Economics.

Even so, Li told the World Economic Forum on Wednesday Beijing will not embark on a huge stimulus drive similar that used to fend off the global financial crisis 10 years ago.

While Trump insists that China is in a weakened state — it is straining under a colossal debt mountain exceeding 250 percent of GDP — and will cave in during trade negotiations, there is a stoic confidence in Beijing.

Even if Washington taxed all imported Chinese goods, “China has ample fiscal and monetary policies to cushion that impact”, said Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC).

“We prepare for the worst, and we think the economy will still be fine,” he said this week.

The state-run China Daily declared in an editorial that the country would “outlast” the tariff war and will instead “emerge stronger”.

And Li saw historical precedents. “For the last 40 years,” he said, “the Chinese economy has overcome all obstacles.”

China shrugs off warnings that trade war with US could slash economic growth