China’s economic strategy in light of Trump’s victory

The recent election of Donald Trump as president has set the stage for significant implications regarding China’s economic policies, particularly concerning fiscal stimulus measures anticipated to be announced soon. As Trump prepares to take office, he has signaled intentions to impose substantial tariffs—potentially exceeding 60%—on Chinese imports to the United States. This development is significant given that the previous round of tariff increases during his first term did not hinder the U.S. from maintaining its position as China’s largest trading partner.

Such a drastic rise in tariffs could arrive at a tumultuous time for China, which is increasingly dependent on exports for economic growth amid a housing market crisis and sluggish consumer spending. Economic expert Zhu Baoliang has suggested that if these tariffs are enacted, they could lead to a $200 billion reduction in Chinese exports and a corresponding 1% slowdown in GDP growth.

In response to these economic pressures, Chinese authorities have intensified their efforts to stimulate growth in recent weeks. The National People’s Congress (NPC), China’s legislative body, is expected to endorse additional fiscal measures aimed at bolstering the economy during its upcoming meeting. Analysts predict that the Chinese government will unveil a stimulus package exceeding 10 trillion yuan (approximately $1.39 trillion), focusing on local government debt swaps and support for the real estate sector.

Yue Su, an economist at the Economist Intelligence Unit, anticipates that the potential “Trump shocks” will prompt the Chinese government to implement more aggressive stimulus strategies. The timing of the NPC meeting coinciding with the election results suggests a readiness to take swift action.

In the wake of Trump’s electoral victory, stock markets have reacted differently in China and the United States. Mainland Chinese stocks, along with those in Hong Kong, experienced declines, while U.S. markets surged to record highs. This disparity in stock market performance indicates that the anticipated Chinese stimulus might be more substantial than previously expected, according to Liqian Ren of WisdomTree.

While Ren predicts that the government will inject an additional 2 to 3 trillion yuan in support annually, he cautions against expecting sweeping measures due to the uncertainty surrounding Trump’s administration. He emphasizes that while tariffs impact both nations, the restrictions on technology and investment pose a more significant challenge for China.

During his first term, Trump imposed restrictions on Huawei, a leading Chinese telecommunications company, effectively barring it from accessing U.S. suppliers. The Biden administration has since expanded these efforts, limiting the sale of advanced semiconductors to China and urging allies to adopt similar policies. These export controls have garnered bipartisan support, with both political parties advocating for increased domestic semiconductor manufacturing capabilities.

Looking ahead, projections suggest that Republicans may hold a majority in the Senate for the next two years, although the balance of power in the House of Representatives remains uncertain. If the GOP maintains control, there is potential for accelerated protectionist measures, which could pose risks to the global economy.

Economists predict that Trump may implement these tariffs in the first half of the upcoming year, potentially utilizing laws that allow for swift tariff actions in response to economic imbalances. Current U.S. data indicates that the trade deficit with China has narrowed to $279.11 billion in 2023, down from $346.83 billion in 2016, suggesting some changes in trade dynamics.

Analysts estimate that a 10% increase in tariffs could lead to a decline in China’s real GDP growth by 0.3 to 0.4 percentage points over the next two years, assuming all other factors remain constant. Despite a 14% drop in Chinese exports to the U.S. last year, the total value remains significantly higher than pre-Trump levels, indicating resilience in trade.

While some experts anticipate immediate and aggressive stimulus measures from Beijing, others believe that the government will take a more measured approach, rolling out support gradually over the coming months. China’s leadership typically convenes in December to outline economic objectives for the following year, with specific growth targets announced during the March parliamentary session.

Regardless of the tariff situation, China continues to maintain a robust export market beyond the United States. In fact, the proportion of Chinese exports directed to the U.S. has decreased, comprising less than 15% of total exports in 2023, compared to nearly 18% in the 2010s. This shift signifies a diversification of trade relationships, with China increasing its exports to ASEAN countries and other markets.

Francoise Huang, an economist at Allianz Trade, notes that while China has lost ground in the U.S. market, it has successfully expanded its influence elsewhere. Chinese exports to ASEAN nations now account for over 25% of imports in those markets, a significant increase from less than 18% in previous years.

In conclusion, as the United States prepares for a new chapter under Trump’s leadership, the focus will be on how China navigates the potential economic challenges posed by increased tariffs and trade restrictions. With a strong emphasis on fiscal stimulus and strategic trade partnerships, China aims to bolster its economy while adapting to the shifting global landscape. The coming weeks and months will be crucial in determining the trajectory of both countries’ economic relations and the broader implications for global trade.