(Bloomberg) -- China may embrace greater stimulus, bolster manufacturing, and allow the yuan to weaken to offset the negative effects of a second Trump presidency on the Chinese economy, analysts said.
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The measures could limit the impact on growth to less than 1 percentage point on average each year over the course of Donald Trump’s four-year term, according to 15 of the 19 economists surveyed by Bloomberg News after the US election last week. Three predicted a 1 to 2 percentage point drop in gross domestic product, while one saw no significant impact at all.
“China will grow more slowly because of the second Trump US administration, though such losses will be partially offset by budgetary and monetary stimulus,” said Dennis Shen, primary China economist at Scope Ratings.
The president-elect has threatened 60% tariffs on Chinese goods that could decimate US-China trade and hurt exports that have been a rare bright spot for the Asian nation this year. That would complicate Beijing’s efforts to stabilize an economy dragged by a years-long property slump and persistent deflationary pressures.
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The prospect of an expanded trade war has raised expectations for the Chinese authorities to unleash more aggressive stimulus measures to spur domestic demand to make up for any drop in exports. A fiscal package unveiled Friday disappointed investors who wanted more direct steps to boost consumption, although Finance Minister Lan Fo’an hinted at bolder steps next year.
An overwhelming majority of economists said they expect China to raise the broad budget deficit in response to Trump’s reelection, the most among all policy options put forward in the survey.
It is followed by loosening monetary policy, more housing support measures and greater investment in advanced manufacturing. Few analysts said direct cash handouts were on the table.
More than half of the respondents said Beijing may weaken the yuan, which would make Chinese exports more competitive and help offset some of the potential tariffs. But economists differed widely on the extent of any such currency depreciation, with estimates ranging from 7.3 to 8 per dollar for 2025.
“This depends on how much tariff we get from the US,” said Zhennan Li, an analyst with Banque Pictet & Cie SA in Hong Kong. He forecast the offshore yuan could weaken to 7.5 against the dollar if the Trump administration puts 20% additional levies on all Chinese imports and as much as 7.7 if the tariffs come in at 60%.
Some economists, including Raymond Yeung of ANZ Bank, said Beijing would want to stabilize the currency rather than engaging in competitive devaluation. A weakened yuan may encourage capital outflows and further discourage investors in a country on track to see its first annual net outflow in foreign direct investment since at least 1990.
The offshore yuan traded at 7.25 per dollar as of 1 p.m. local time Tuesday, the weakest since August.
The respondents were less equivocal when it comes to what US imports China may hit in response to tariffs. A large majority of them cited agricultural products as the most likely type of goods to be targeted by retaliatory levies, over categories such as minerals and cars.
Factories and farms across America’s Midwest and South are at the heart of Trump’s political support, and their output was often targeted by China in retaliation to tariffs during his first term.
Soybeans are the likeliest target, economists said, followed by beef and corn and then cars. Beijing could also restrict its exports of rare earths and batteries for electric vehicles to retaliate, according to some of the respondents.
Trump’s tariffs may drive China to develop closer ties with other trade partners, such as Southeast Asian countries and even the EU, which followed the US into raising trade barriers to slow an influx of cheap Chinese goods.
Chinese manufacturers are likely to increase investment in overseas production bases to avoid US levies and buffer themselves against trade shocks, some of the economists said.
Others, however, warned that Chinese exporters seeking to sell more to other nations to make up for losses in the US market could spark backlash from those countries as well. This could in turn sow the seeds for an escalated, multi-front trade war for Beijing.
“This will trigger some pushback among these trading partners, who will move to protect domestic industries against increased Chinese imports,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
--With assistance from Wenjin Lv.
©2024 Bloomberg L.P.