Less than 48 hours after Donald Trump’s resounding electoral victory in the US was confirmed, China has stepped up. The Asian giant knew that a return of Trump to the White House would intensify the constant tensions between both powers, especially due to the 60% tariffs that the Republican candidate wants to impose on imports from China. In anticipation of this scenario, it was to be expected that Beijing would begin to build stimuli to defend against this ‘windstorm’ from Washington. The first salvo arrived this Friday with a package intended to help local governments suffocated by debt. However, as has been happening in recent months, the announcement by the authorities They have left markets cold that expect more ambition on the part of the leaders when it comes to reviving a China that has been weakened after the covid and that now may suffer more from the American blow.
China has announced a program of ten billion yuan (1.4 trillion dollars) for refinance local government debt. Beijing will raise the debt ceiling of local governments to 35.52 trillion yuan, allowing them to issue six trillion yuan in additional special bonds over three years to redeem hidden debt, the news agency reported this Friday. Xinhua. Authorities have later said that local governments will be able to use another total of four trillion yuan in new installment of special local bonds over five years for the same purpose.
The plan approved by the Permanent Committee of the National People’s Assembly It is broadly in line with what economists expected, as China tries to curb financial risks and shore up growth. The exchange is “an important political decision that takes into account the national and international development environment, the need to guarantee stable economic and fiscal functioning and the real development situation of local governments,” the authorities have declared. Bloomberg.
The Chinese economy grew 4.6% in the third quarter, the weakest pace since March of last year, calling into question Beijing’s ability to achieve its annual expansion target of around 5%. This slowdown led policymakers to adopt more favorable policies, such as interest rate cuts and aid to the stock and real estate markets. Trump’s electoral victory has fueled the calls for Beijing to strengthen policies aimed at boosting domestic demand to offset a possible drop in exports due to the president-elect’s tariff threats.
The plan approved by the Standing Committee of the National People’s Congress is close to the upper range of most economists’ forecasts, at a time when China seeks to curb financial risks and shore up growth. It is the first time since 2015 that authorities have raised the debt ceiling for local governments in the middle of the year. The fact that figures of this magnitude were expected and that leaks to the press spoke of this range has caused disappointment in the markets.
The Chinese stocks and yuan have fallen after authorities announced the 10 trillion yuan program. Futures for the FTSE China A50 index have fallen more than 5% after the move was announced. The weakness has also had repercussions on global markets, causing falls in oil and iron ore pricesreflecting concerns that a prolonged slowdown in the world’s second-largest economy will reduce demand for key raw materials.
Capital Economics: “Clearly, this is not going to make any appreciable difference in aggregate demand”
“Unless there is more news this afternoon, today’s fiscal announcement is another disappointment for those who were hoping for a substantial stimulus,” notes Mark Williams, chief Asia economist at Capital Economics. “Reducing interest costs will free up resources for local governments to spend on other things. The finance minister has suggested this would amount to 600 billion yuan (0.46% of current GDP) spread over five years. Clearly, that will not make any appreciable difference in aggregate demand“, he delves.
“Overall, the market could be disappointed by the lack of new stimulus,” analyzes Xiaojia Zhi, research director at Credit Agricole CIB. “Nevertheless, we expect a significant fiscal package in the coming years with additional spending of 12 to 13 trillion yuan over the next three years, with the aim of offsetting the negative impact on growth of aggressive US tariff hikes.
“Regarding greater government stimulus, the Chinese government has made it clear that it will do whatever is necessary to revive the economy. However, Trump’s victory may mean greater stimulus and a faster response,” says Sandy Pei, analyst of Federated Hermes. Despite this, he clarifies, “this is not the first time that US tariffs have been a potential problem and, this time, Chinese companies are more prepared. We have seen many diversify their production base, establishing plants in Southeast Asia, Mexico and Eastern Europe. Chinese exports have continued to grow; to the US have slowed down, but in other regions of the world they have increased, and high value-added products continue to have good results in international markets.
“While Trump is widely expected to raise tariffs in his second term, when and how he will do so is still under discussion. We believe that the 60% tariff proposal can be a starting point for negotiations instead of a fixed figure; “You may remember that the first trade war saw a truce after an agreement by China to increase imports of American agricultural products,” says Lynn Song, an analyst at ING.
From the research service of the Dutch bank they see two paths to reduce the trade deficit between the US and China: “Either by reducing China’s exports to the United States or by increasing Chinese imports of US products. Taking into account the respective impacts on the inflation and job creation, we assume that the latter would also be a positive outcome for the Trump Administration.”
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