HSBC is warning of a big slowdown in China's economy if the US slaps all its imports with tariffs

People shelter against rain in Hangzhou.
  • The trade war between the United States and China has suddenly escalated, sinking the view held only a few weeks ago that a trade deal between the two nations was inevitable.
  • The US has already increased tariffs on $US200 billion worth of Chinese imports. It could soon hit all Chinese imports with 25% tariffs.
  • HSBC estimates such a move could lop 1.1 to 1.2 percentage points off Chinese GDP growth.
  • China is Australia’s largest bilateral trade partner by some margin.

The trade war between the United States and China has suddenly escalated, sinking the view held only a few weeks ago that a trade deal between the two nations was inevitable.

On Friday, the United States announced an increase in existing tariffs on $US200 billion worth of Chinese imports from 10% to 25%. It also warned that it had begun the process of raising tariffs on a further $US300 billion worth of Chinese imports, meaning essentially all Chinese imports going to the United States will now be hit with 25% tariff rates.

Given the events of recent days, it would be bold to say that threat won’t be implemented in reality.

So what will such a move mean for the Chinese economy, if it comes about?

According to HSBC, it will have a meaningful impact on the Chinese economic growth, increasing the likelihood of more aggressive stimulus measures being rolled out by Chinese policymaker

“HSBC Economics estimates that the increased tariffs will shave 0.3-0.5 percentage points (ppt) off China’s growth over the next 12 months,” it said in a note released on Monday, referring to the recent increase in tariffs on $US200 billion of Chinese imports.

“In the event that the US goes a step further and implements 25% tariffs on the remaining imports from China, they estimate such a move would take another 1.1-1.2ppt off China’s growth.”

So Chinese economic growth could slow from an annual pace of 6.4% in the March quarter this year to the low 5% range within the next year, according to HSBC’s estimates.

If that eventuates, the bank believes Chinese policymakers will have little choice but to roll out additional stimulus measures, including the potential for a cut in official policy rates.

“The increase in tariffs is likely to result in more policy easing from China, both monetary as well as fiscal,” HSBC said.

“In terms of execution, monetary easing is likely to be faster and easier.”

“HSBC Economics expects an acceleration in required reserve ratio reductions and does not rule out a policy rate cut. The policy rate cut could come in the form of a traditional lending rate cut or tweaks in the open market operation rates, such as the reverse repo rate.”

Despite a variety of fiscal and monetary policy stimulus measures that have been rolled out in recent years, China’s benchmark one-year lending rate has remained steady at 4.35% since late 2015.

Even with the likelihood of further stimulus being delivered to the Chinese economy, HSBC warns the “potential growth slowdown in China would have significant ramifications for the rest of the Asia-Pacific, which depends on China’s demand for their exports”.

That unfortunately includes Australia.

According to data released by Australia’s Department of Foreign Affairs and Trade (DFAT), the value of bilateral trade with China stood at $A194.62 billion in the 2017/18 financial year, near-triple second-placed Japan at $A77.6 billion.

Australian exports to China totalled $$123.3 billion over the year, largely reflecting China’s insatiable demand for Australia’s raw materials but also tourism and educated-related exports.

While China has often looked to stimulate its economy by rolling out increased infrastructure investment, helping to boost demand for Australia’s commodities in the past, most noticeably in the immediate aftermath of the GFC, whether policymakers choose this path or another on this occasion is yet to be determined.

If the trade war escalates, Australia may well find out.

NOW READ: China’s nasty threat to retaliate against the US in the trade war would backfire catastrophically

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