Trump's New Tariff Hit Threatens Xi's 2020 Economic Growth Goal

(Bloomberg) -- China is likely to load up extra stimulus this year to boost consumption following U.S. President Donald Trump’s tariff increase, as otherwise the Communist Party faces failure to meet its long-term growth target.

That’s the conclusion from a Bloomberg survey of 18 economists, who forecast 2019 gross domestic product growth will be lowered by 0.3 percentage point by the rise in U.S. tariffs on $200 billion of imports from China. If more tariffs are introduced to cover all Chinese goods, that will cost China 0.6 percentage point in the 12 months after, according to the median estimates of those polled.

See here for the full results of the survey

The target of doubling the size of the economy in 2010 by next year to help reach a “moderately prosperous society” has guided economic policy for a decade. Growth this year and next needs to come in at 6.1% or above, in order for officials to claim success as they celebrate the centenary of the Communist Party in 2021.

Economists had forecast an expansion of 6.3% this year and 6.0% in 2020, before the latest trade-war escalation.

Trump's New Tariff Hit Threatens Xi's 2020 Economic Growth Goal

An all-out trade war conflagration between the world’s two-largest economies risks tipping the U.S. economy into recession by the end of 2020, Moody’s Analytics forecast this week. That would also negatively affect demand for Chinese goods.

Below are supportive measures that the surveyed economists think the government could use if expansion slows, in order of likelihood.

Rank Stimulus Measures
1.Expand measures to boost consumer spending 
2.Reduce reserve requirement ratio for banks
3.Ease property purchase curbs
4.Devalue yuan
5.Reduce benchmark interest rates

China’s economic planners were already drafting a series of stimulus measures to bolster sales of cars and electronics, Bloomberg reported last month. The draft included subsidies for new-energy vehicles, smartphones and home appliances, and calls for an increase in the number of automobile licenses, people familiar with the matter said then.

Existing Stimulus

There’s no guarantee that all those measures will happen, but they will come on top of tax cuts, increased spending, and five cuts to the reserve requirement ratio since last year.

Xi’s officials have soft-pedaled the 2010 growth goal for the past couple of years, as they’ve sought to boost the “quality” of expansion amid a debt cleanup and environmental campaigns. While that approach also helps explain the targeted nature of the past year’s stimulus measures, officials have also made clear they will act to prevent a slump in the economy.

“The government has already stated to boost domestic demand in order to mitigate external uncertainty,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. He said devaluing the yuan is unlikely, as “the bottom line is to safeguard financial stability.”

More Stimulus

According to those surveyed, additional measures could be boosting infrastructure spending, offering additional tax breaks to companies spending on high-tech equipment, and having the central bank increase operations such as medium-term lending facility to keep liquidity ample.

China’s economy looked like it had stabilized in the first quarter, with better-than-expected growth supported by massive credit expansion and a reduction in tensions with the U.S. But exports were still falling due to weak global demand, and with tensions on the rise again, the government and authorities may be starting to look more nervously at what will drive growth, and the jobs it creates, for the rest of the year.

The survey was conducted between May 7 and May 9. Those polled were asked what their growth and policy forecasts would be in the event that the U.S. raised tariffs Friday.

©2019 Bloomberg L.P.