US economy

US-China trade war will last over a year, predict economists


Concerns are spreading over the impact a prolonged trade war between the US and China could have on the Chinese economy, a joint survey by Nikkei and Nikkei Quick News of China-focused economists showed.

The economists estimate that the country’s real gross domestic product grew at an annualised rate of 6.6 per cent in the period between July and September, slightly slowing down from 6.7 per cent for the April-June period.

Many experts believe the trade war will persist for a long time, potentially putting the brakes on the world’s second-largest economy.

The US and China have slapped retaliatory tariffs on each other’s goods and the prospects for a dialogue between the two countries is fading. A deterioration in manufacturers’ sentiment is one impact gradually surfacing in the Chinese economy.

“The trade war is the biggest risk to the Chinese economy, not only for the export sector but also the related supply chain,” said Iris Pang, an economist focusing on Greater China at ING Bank. “Among all corporates, SMEs [small and medium sized enterprises] would be hit most. As a result, manufacturing and investment in the manufacturing sector would grow slower.”

This article is from the Nikkei Asian Review, a global publication with a uniquely Asian perspectives on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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The structural reforms Beijing initiated before the trade war became full blown are adding downward pressure on the economy.

Yao Wei, chief China economist at Société Générale Corporate and Investment Banking, said: “More signs of economic slowdown have emerged as deleveraging policies start to bite.” She added that “trade tensions look unlikely to be resolved quickly and may begin to cause material drags on exports”.

The full-year growth estimate for 2018 is 6.6 per cent. Those for 2019 and 2020 are 6.3 per cent and 6.2 per cent, respectively. The figures are unchanged from the previous survey conducted in June. The slowdown is expected to be inevitable, however, given the 6.9 per cent growth recorded in 2017.

The economists gauged the impact of the trade war under a basic scenario that the economy is slowing moderately.

“Trade friction with the US looks set to continue, and this will be an unavoidable drag on growth. However, recent policy stimulus measures will offset the damage from trade by boosting the domestic economy, which should prevent too much of a slowdown,” said Richard Jerram, chief economist at Bank of Singapore.

At its politburo meeting in July, the Chinese Communist party decided to continue proactive fiscal policies and prudent and neutral monetary measures as means to support the economy.

“That direction will help improve the negative sentiment in the financial markets and stabilise the country’s monetary system during the three months through December,” said Cheng Shi, chief economist and head of research at ICBC International. Mr Cheng continued: “The positive impact of the measures will become visible in the January-March period after they directly stimulate investment and consumption.”

Fan Xiaochen, a director at MUFG Bank, who was also positive on the measures, said: “Healthy and proactive fiscal and monetary measures will help attract new investments, and the economy will continue growing at a stable pace of more than 6 per cent.”

On the other hand, some analysts remain cautious. “We expect infrastructure growth to recover from its low but maintain single-digit growth in the coming year,” said Peter So, managing director and co-head of research at CCB International Securities.

The risk factor that will most likely put downward pressure on the Chinese economy is the possible worsening of the trade war between the US and China; the largest number of analysts surveyed picked this answer from a number of options.

Economists expect the stimulus to kick in later this year to shore up the Chinese economy © Reuters

“We estimate that an all-out trade war could shave as much as 1.5 per cent off China’s GDP growth in the coming 12 months, all else being equal,” said Aidan Yao, a senior economist on emerging Asia at Axa Investment Managers Asia Ltd.

On the whole, analysts remained pessimistic about the future of the trade dispute between the world’s two largest economies. Asked about the outlook for the conflict in the next 12 months, only five of the 16 analysts said it would calm down after the US midterm elections in November, while six said the situation would remain unchanged and the rest expected it to get worse.

“Both the US and China do not seem too interested in a deal. With Mr Trump’s determination to correct the trade deficit and be hard on its growing rival China, we do expect him to go further and look into tariffs on the remaining $260bn,” said Susan Joho, economist at Julius Baer.

Kenny Wen, wealth management strategist at Everbright Sun Hung Kai, said that even if tensions ease somewhat after the US elections, a battle could break out over technology and currencies, in which case the US would take aim at China.

As for the effect of the US-China trade war on the Chinese economy, out of multiple options, many economists chose blows to exporters and the high-tech industries. Xie Yaxuan at China Merchants Securities expressed concern that the US’s additional tariffs target the high-tech industry, China’s most important sector in the long run.

Many economists expect the People’s Bank of China to continue its accommodative monetary policy. Most economists predict the central bank will lower its reserve requirement ratio — the percentage of deposits that must be held by commercial banks over the next 12 months — by 0.25-0.5 percentage points several times.

“The PBoC is concerned about the growth outlook, thus efforts on deleveraging are sidelined and ‘economic stability’ has gained top priority,” said Sean Taylor, Asia-Pacific chief investment officer at DWS.

More economists expected the renminbi to weaken against the dollar compared with the previous survey. The average forecast for the renminbi was 6.85 to the dollar at the end of 2018, 6.85 at the end of 2019, and 6.71 at the end of 2020.

The economists who responded to the survey were: Arjen van Dijkhuizen, senior economist, ABN AMRO Bank; Aidan Yao, senior emerging Asia economist, Axa Investment Managers Asia Ltd; Paul Tang, chief economist, Bank of East Asia; Richard Jerram, chief economist, Bank of Singapore; Peter So, managing director and co-head of research, CCB International Securities Ltd; Xie Yaxuan, China Merchants Securities; Kevin Lai, Daiwacm; Chris Leung, executive director and chief China economist, Group Research, DBS Bank (Hong Kong) Ltd; Sean Taylor, chief investment officer, Asia Pacific, DWS; Kenny Wen, wealth management strategist, Everbright Sun Hung Kai; Brian Coulton, chief economist, Fitch Ratings; Thomas Shik, chief economist, head of economic research, Hang Seng Bank Ltd; Frederic Neumann, co-head of Asian Economics Research, HSBC; Cheng Shi, chief economist, managing director and head of research department, ICBC International; Iris Pang, economist, Greater China, ING Bank; David Rees, emerging market strategist, J Safra Sarasin; Susan Joho, economist, Julius Baer; Ken Chen, Chinese economy analyst, KGI Asia Ltd; Veasna Kong, assistant director and economist, Moody’s Analytics; Robin Xing, chief China economist, Morgan Stanley; Xiaochen Fan, director, MUFG Bank; Ting Lu, chief China economist, Nomura; Yao Wei, China economist, Société Générale Corporate and Investment Banking; Shuang Ding, head of Greater China economic research, Standard Chartered Bank (HK) Ltd; Tetsuji Sano, chief Asia economist, Asia Research Center, Sumitomo Mitsui Asset Management (Hong Kong); Tao Wang, head of China economic research, UBS

A version of this article was first published by the Nikkei Asian Review on October 4, 2018. ©2018 Nikkei Inc. All rights reserved.

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