Trade war would hurt China growth
An escalating trade war could be disastrous for debt-laden China and drive its growth into low single digits, according to Morningstar US analysts.
An escalating trade war could be disastrous for debt-laden China and drive its growth into low single digits, according to Morningstar US analysts.
The recent falls in Hong Kong and China stock markets reflect investor fear and uncertainty over the risks, say Lorraine Tan, director of equity research, Asia, and Iris Tan, senior analyst, China Financials, in a recent report titled Escalating US-China trade war raises risks.
According to the report, an “all-out trade war” would diminish the long-term spending power and welfare of American consumers but the economy would remain intact.
China, on the other hand, is at greater risk of a hit to growth, given its dependence on its trade surplus as a source of aggregate demand.
“We think a trade war could be disastrous for China. While in the past (most notably post-2008), China has been able to boost debt-fuelled investment expenditure to replace flagging trade as a source of demand, we think this option is now ruled out by China's swelling debt burden.
“As such, a trade war could send China's economic growth into the low-single digits – likely a politically unpalatable option in a country accustomed to much higher levels,” say the report authors.
China is at greater risk of a hit to growth in the event of a trade war.
Last month China's central bank cut for the third time this year the reserve ratio requirement - the amount of cash that some banks must hold as reserves.
The 50-basis point cut aims to accelerate the pace of debt-for-equity swaps and stimulate lending to smaller businesses.
However, according to the report, the reserve bank’s reduction “doesn’t expand the amount of productive investments available in China, which would be required to offset any negative trade impacts.”
Despite the escalation in trade tensions, Morningstar has already factored in in slowing activity as the country rebalances, forecasting real GDP growth of 5.1 per cent in 2018 - below the consensus range of 6.5 to 6.8 per cent.
“We forecast real GDP growth to average only 3.8 per cent over the next 10 years and remain comfortable with this estimate. We believe reinvestment in China remains on a slowing growth path and a trade war only reinforces this trend,” say Tan and Tan.
As they stated in a report issued earlier in 2018, Tan and Tan doubt China will try to spend its way out of a slowdown, given the bulging debt-to-GDP ratio of 261 per cent.
In the event of a “worst-case scenario” 50 per cent drop in China’s exports to the US, China’s real GDP should slow by 1 per cent. However, they view this as unlikely, and assume the tariffs would be absorbed by either the exporting manufacturer, or customers – or a mix of the two.
“Assuming that half of the increased tariff is absorbed on the US$250bn in China imports and there is a 10 per cent impact to volume, the impact to China’s GDP would just be 0.4 per cent.”
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Lex Hall is a Morningstar content editor, based in Sydney.
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