China’s tariff response_Trade tensions may accelerate policy easing

Summary of Conference Call Notes Industry Overview - The conference call discusses the impact of recent US tariffs on Chinese goods and the broader implications for China's economy and policy responses. Key Points and Arguments Tariff Impact on China's Economy - The US has imposed a 10% additional tariff on goods imported from China, effective February 4, 2025, which may reduce China's GDP by approximately 0.3 percentage points [2][10][12] - The analysis assumes that 70% of the tariff cost will be borne by US importers, leading to a 7% price increase on Chinese imports [13][17] - The US import elasticity is estimated at 2, indicating that a 1% price increase could reduce import demand by 2% [13][17] Policy Support and Domestic Consumption - Rising trade tensions may catalyze more aggressive domestic policy support from China, focusing on stimulating domestic consumption [3][18] - Premier Li Qiang has emphasized the need for "break-the-mold" policy support, suggesting potential upside surprises in fiscal measures [3][18] - The government is expected to increase the budget deficit to 4% of GDP and issue RMB2 trillion in special treasury bonds and RMB4.2 trillion in special local government bonds in 2025 [3][18] Fiscal Reforms - Elevated trade risks may serve as a catalyst for broader fiscal reforms, which are essential for restoring local government fiscal discipline and addressing debt risks [4][19] - The Third Plenary Session in July 2024 pledged to accelerate fiscal and taxation reforms, with more details anticipated at the National People's Congress in March 2025 [4][19] Retaliatory Measures and Trade Strategy - China's retaliatory measures to the US tariffs have been relatively contained, including tariff hikes of 10-15% on about 8.5% of its US imports [15] - There is speculation that China may be willing to reinstate the 2020 'Phase One' trade deal and increase investments in the US to mitigate tensions [15][16] Long-term Economic Strategy - China is likely to pivot towards enhancing domestic consumption and reducing reliance on exports due to rising trade tensions with multiple economies [16] - The focus will be on structural reforms and fiscal sustainability to ensure long-term economic stability [4][19] Other Important Insights - The share of domestic value-added in China's exports was 83.7% in 2022, indicating a significant portion of exports contributes to domestic GDP [14] - The potential for further escalation in trade tensions remains, but China appears to be adopting a more cooperative approach rather than a tit-for-tat strategy [15][16] This summary encapsulates the critical insights from the conference call regarding the implications of US tariffs on China, the expected policy responses, and the broader economic context.