China’s growth goal will need big stimulus if trade war escalates

President Xi Jinping signalled China’s determination to push ahead with an ambitious growth goal this year despite the trade war. If Donald Trump boosts tariffs further, analysts say Beijing will need to unleash big stimulus to hit the target.

China announced an expansion target of about 5 per cent for 2025 at its annual parliamentary session on Wednesday, marking the first time in more than a decade that Beijing had set the same goal for three straight years. That resolve to put a floor under growth came less than a day after Trump lifted fresh blanket US tariffs on Chinese goods to 20 per cent, with more levies looking inevitable.

If Donald Trump boosts tariffs further, analysts say Xi Jinping will need to unleash big stimulus to hit China’s growth target.Credit: AP

As tariffs threaten to damage a major driver of growth, Chinese officials are trying to balance projecting strength while managing financial risks. Unleashing greater stimulus to fill a hole left by falling US trade would undermine Xi’s long-standing efforts to rein in surging debt. Beijing has resisted “bazooka” stimulus since the pandemic, in contrast to previous downturns and other major economies.

“It would come down to a political decision about what price they’re willing to pay for growth,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong, referring to a scenario involving big tariff hikes. “Officials might be able to ramp up fiscal stimulus to hit the target, but the question is whether they’d be willing to accept a substantial rise in debt to do that.”

One way China could avoid having to unleash more stimulus would be to strike a deal with Trump. That could see Beijing pledge to buy more US goods, or offering for domestic firms like electric vehicle giant BYD to put factories on American soil. While Trump signalled a desire to speak with Xi last month, they have yet to have a call since the US leader took office, putting the focus on domestic policy.

For now, Xi is keeping calm as Trump’s trade war unfolds ... But there are no guarantees things will stay cordial if tariff levels do seriously jeopardise China’s growth trajectory.

If tariffs rise to the 60 per cent level Trump floated on the campaign trail, they could knock 2 percentage points off China’s growth this year, says Larry Hu, chief China economist at Macquarie Group. While losing that revenue would be a challenge, analysts agree that stimulus could mitigate the impact.

Officials have already alluded to more support ahead. Shen Danyang, the official in charge of drafting the government work report, said at a press briefing on Wednesday: “There are, in fact, backup plans for macroeconomic policies, and policies will be adjusted dynamically to respond proactively to the changing situation”.

Any additional measures will likely come after officials have had time to digest the effect of tariffs on growth. China will release its official first-quarter economic growth data in mid-April, which will be followed by an economy-focused huddle of the decision-making politburo.

Analysts are split on exactly what it would cost to fill the gap left by exports to the US, with Carlos Casanova, senior Asia economist at Union Bancaire Privee, saying it would take “in the ballpark of tens of trillions of yuan”. That estimate takes into account Beijing shoring up the property sector and cleaning up a wall of local government hidden debt maturing through 2026.

Pumping an additional 1 trillion to 2 trillion yuan (as much as $436 billion) worth of stimulus would save the growth target, says Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp., while Wang Tao, chief China economist at UBS, sees more than 2 trillion yuan being added to the broad fiscal deficit as another possibility.

Chinese authorities will need to step in with forceful measures to help the property market bottom out if Trump’s tariffs rise significantly, economists say. Steps could include injecting money into the market to absorb housing inventory.

Stabilising the property market would be key to shoring up domestic demand – something top leaders earmarked as their top priority this year – as falling property prices since 2021 have resulted in a negative wealth effect that’s made Chinese consumers less willing to spend.

Beijing used a similar playbook to get the economy out of a rut in 2015 when the central bank unleashed money to finance a shantytown renovation project that created a massive demand for new housing and cleared inventory.

“In China, the most powerful macro policy is a merge of monetary, fiscal and housing policies, i.e. financing fiscal spending on housing with the central bank’s balance sheet,” Macquarie’s Hu said. “They will use that if exports slow sharply.”

Another option for China is devaluing the currency. During the first trade spat in 2018 and 2019, the yuan depreciated by 11.5 per cent versus the greenback and offset about two-thirds of the tariff hike, analysis from Morgan Stanley economists including Robin Xing found.

This time around, that would be harder. The yuan is already at the weaker bound of a range that the People’s Bank of China is comfortable letting the currency fluctuate within, and such a move would risk triggering capital outflows.

For now, Xi is keeping calm as Trump’s trade war unfolds, responding with only moderate measures. But there are no guarantees things will stay cordial if tariff levels do seriously jeopardise China’s growth trajectory.

Hours after the growth target was unveiled, the Chinese embassy in the US posted on X: “If war is what the US wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight ’til the end.”

Bloomberg

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