According to Goldman Sachs Group Inc., China may already be adjusting its economic agenda in anticipation of potential impacts from a possible Trump presidency. Andrew Tilton, Goldman’s chief economist for Asia Pacific, noted in a recent Bloomberg interview that Beijing is likely holding fiscal resources in reserve as a precautionary measure.
China’s Cautious Fiscal Approach
One significant reason for China's cautious stance on implementing extensive fiscal stimulus is the risk posed by Donald Trump. Tilton explained, "One reason why they’ve been cautious on doing a lot of fiscal stimulus or demand-side stimulus is just that there is the risk of Trump. And I think some of the logic is just: ‘let’s save the ammunition in case we need to do a lot more in 2025.’”
Trump, who has been leading in polls for months, has promised to impose 60% tariffs on Chinese imports if elected. This policy could significantly impact China’s exports and manufacturing sector, potentially reducing its real economic growth by around 2 percentage points, as estimated by Goldman.
Economic Implications of Tariffs
Economists have increasingly called on Beijing to increase the budget deficit and issue additional sovereign debt to stimulate the economy, especially when businesses and households are hesitant to spend. However, Chinese policymakers might be opting for fiscal restraint now, saving these measures for future use if needed to counteract potential tariff impacts.
China's overall government expenditure fell nearly 3% in the first half of the year compared to 2023. This fiscal conservatism has made it difficult for China to boost domestic demand and reverse declines in real estate and consumer spending. Instead, economic growth has relied on global demand for Chinese goods, a strategy complicated by trade restrictions from various partners.
Regional and Global Market Reactions
Concerns about the economic outlook have affected the equities market, with Chinese stocks experiencing significant declines. The CSI 300 Index closed down 0.6% on Wednesday, marking a three-day loss of over 3%, the largest since January 31.
Additionally, a growing number of countries have imposed tariffs on Chinese imports, including the US targeting solar panels and the European Union's levy on electric vehicles. Recently, Indonesia has also investigated tariffs on various consumer goods, indicating widespread concern beyond just steel and renewable energy technology.
Monetary Policy Adjustments
In response to these challenges, China has begun implementing measures to revive growth. The People's Bank of China recently cut a key lending rate by 10 basis points to 1.7% to encourage borrowing. Goldman Sachs anticipates another similar-sized cut in the fourth quarter, aiming for a looser macro policy over the next few months to achieve the approximately 5% growth target for the year.
This move by the People's Bank of China comes ahead of potential actions by the US Federal Reserve, which could weaken the local currency. Tilton noted, “China has been a little bit more willing to allow a small amount of depreciation, perhaps anticipating the higher risk of a Trump presidency, or perhaps just having been surprised by how long the US has kept rates high.”
The US dollar is expected to strengthen further under Trump due to expectations of increased fiscal support, which could continue to exert currency pressure across Asia.
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