China: Preparing for “Full Blown” Trade War

Published on June 10, 2019

Chinese officials still hold low expectations for the G20 meeting in easing trade tensions between China and the United States, and have yet to commit to or formally discuss prospects for a summit between Presidents Xi Jinping and Trump on the sidelines of the G20 meeting in Osaka at the end of this month. But conceded “it is better to talk than not to talk.” 

*** Instead, various Chinese ministries are being instructed to further prepare a series of countermeasures for a possible” full-blown trade war” between China and the US. Those measures will include ten tasks to counter President Trump’s Huawei ban, among them granting 5G commercial licenses eight months ahead of schedule, supporting Huawei to officially launch its own operating system — “HongMeng OS” — in September, and planning to produce domestic 7-nanometer chips by the end of 2020. ***

*** Chinese officials note US Treasury Secretary Stephen Mnuchin passed a message to President Xi, via Peoples Bank of China Governor Yi Gang at the recent G20 finance and central bank governors meeting, that the US hopes “both sides” will strive to make progress to “ensure the trade war does not escalate;” but they noted Secretary Mnuchin did not soften the US position.***

*** On the currency front, Chinese officials continue to believe that the RMB will not break the 7 level before a full blown trade war , but in the event of a full blown trade war they are presuming “market pressures” will drive the RMB down to as low as 7.20 without PBOC intervention. But they assert their confidence that a fall to that level would not cause “severe” turbulence in China’s financial market and that any capital outflows in a weakening of the currency would be limited, certainly short of “large-scale” capital outflows. ***

In addition to the Huawei counter measures, five departments lead by the National Development Reform Commission has set up export control and economic sanctions systems for strategically important products as well as establishing the list of “unreliable entities,” those foreign companies deemed to seriously damaging the interests of domestic firms or poising actual or potential threats to China’s national security. 

NDRC’s Estimated Trade War Impact

According to the latest forecast by the NDRC on June 6, the impact of the latest round of tariffs on China’s GDP growth this year will not exceed 0.07 percentage points. Even if a full-blown trade war breaks out, the NDRC estimates that China’s GDP would only drop to 6.2-6.3% from 6.4-6.5% this year.

All imposed tariffs by the US to date will not have a significant impact on China’s economic growth this year or next: China’s exports will not drop sharply in the second half of this year, even if a full-blown trade war breaks out, and the trade and economic officials assert confidence higher exports to Europe, ASEAN and the Belt and Road countries will be enough to offset any decline in Sino-US trade.

NDRC reported that exports to the US only account for about 3% of China’s GDP and estimated that the US trade deficit with China is actually closer to $150 billion and not the $410 billion that the US has reported. 

According to the NDRC, existing macroeconomic policies, especially fiscal, monetary and investment policies, are sufficient to stabilize growth this year, despite the latest US tariffs hike. 

Existing macroeconomic policies will ensure a year on year growth of 6.4% in 2019, and the government will adopt additional policy easing, such as fiscal expansion or interest rates cuts to stabilize the economy and financial market if the trade war further escalate and the Federal Reserve cuts rates. 

China’s Trade Position Bolstered by Russia

Chinese officials also reported on President Xi’s recent visit to Moscow and his meeting to secure the full support of Russian President Vladimir Putin to help deter a US-launched trade war against China that would entail a sharp deterioration in China-US ties. Whether the US provokes China or Russia, both countries will firmly stand with each other to deal with the US, Chinese officials assert.  

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