MNI: China Urged to Aid U.S.-Trade-Exposed Regions

China will need to provide additional support for regions and sectors most dependent on U.S. trade, as efforts currently focused on redirecting sales to the domestic markets will be met with insufficient demand, advisors and analysts told MNI, adding that what exporters really need is lower U.S. tariffs.

Last week’s Politburo meeting produced more front-loaded measures already announced over fresh stimulus, as Beijing awaits greater clarity on Sino-U.S. negotiations, said Tang Yao, associate professor in the Department of Applied Economics at Guanghua School of Management, Peking University. He left open the possibility that authorities could increase the deficit-to-GDP ratio above the planned 4%, or allow additional special treasury issuance later this year, predicting that China’s Q2 GDP growth will likely fall to just over 4% from Q1’s 5.4% gain. (See MNI EM INTERVIEW: China To Boost Stimulus In U.S. Tariff Response)

“Beijing should wait for the opportunity to start negotiations with Washington, as the U.S. will soon suffer from higher inflation, and decreasing corporate profits and unemployment, which will give China more bargaining chips at the table,” he said. A deal that returns tariffs back to the more manageable, pre-April 2 20% level will help exports, but the U.S. administration may deem circa 50% an equilibrium point that contains China without causing too much domestic pressure, Tang argued.

Meanwhile, China could offer import tariff rates equivalent to those under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – with about 99.5% of products enjoying zero tariffs – to other countries through bilateral and multilateral negotiations to help repair the damaged multilateral trading system, Tang added. (See MNI INTERVIEW: Global Rebalancing Has No Easy Solution - Pettis)

DIFFICULT DOMESTIC MARKET 

The domestic and other global markets will find absorbing the USD463 billion of exports meant for the U.S. market difficult within a short period of time, Tang added. Intermediate goods accounted for about half of China’s shipments to the U.S., with consumer goods making up the remainder – equivalent to about 4% of domestic retail sales, he added. “Retail sales may only grow by 4-5% y/y this year,” he continued.

China’s consumption habits, demand preferences, and cultural background, alongside a lack of sales channels and low consumer recognition will prove challenging for exporters turning to the domestic market, said Zheng Jichang, president of the Federation of Service Industries of Zhejiang Province.

The move would only provide a temporary buffer, as weak domestic demand remains the key obstacle and efforts to boost consumption through higher incomes, and better social welfare will take years to bear fruit, added Chen Li, an analyst at ANBOUND think tank.

TARGETED BAILOUT

Zhejiang province, which has China’s highest export dependency on the U.S. at 7%, far above the national average of 2.8%, will offer financing support and export credit insurance to industries most affected, while also creating platforms to help businesses diversify their markets to Belt and Road countries, said Zheng, also an advisor to the provincial government. After a 7.3% year-on-year increase in foreign trade in Q1, which contributed 66.4% of the nation's total trade expansion, Zheng remains optimistic that Zhejiang will see positive results for the rest of the year.

Chen suggested authorities should improve the export tax rebate, reduce or exempt income tax for small and tech-based exporters and cut tariffs on some imported raw materials and parts to lower their production costs. Authorities could also allow regions with higher export dependency to issue more special bonds or establish targeted subsidies, Chen said, adding that extending the duration of social security subsidies and ensuring timely unemployment insurance payments are also essential.