The damage to China’s economy from a trade war with the US cannot be immediately made good, even in the case of a resolution with US President Donald Trump, Citigroup Inc economists said.
That is because the tariff war is underlining China’s rising cost of labor at a time when the job market is under pressure, Citi economists led by Liu Li-Gang (劉利剛) said in their economic outlook report for next year.
The trade war with the US could cut China’s export growth by nearly half next year, putting about 4.4 million jobs at risk, they wrote.
“It is a reality that China is losing some of its cost competitiveness, especially in labor-intensive and low-value-added sectors,” the report said. “Although shifting the supply chains is not feasible in real time, manufacturers may seriously weigh the option of leaving China if punitive tariffs last longer than expected.”
Even amid signs of a detente between Beijing and Washington, Citi’s baseline scenario is still that a 15 percent additional tariff would be levied on Chinese exports after March 1, as 90 days might be insufficient to resolve “large differences” between the two countries on issues of intellectual property protection, forced technology transfer, state support to state-owned enterprises, and cyberintrusion and theft.
The trade war would cut China’s export growth to 5.1 percent next year, the economists said.
The 25 percent tariffs on US$250 billion of imports from China would reduce China’s exports by 5.6 percentage points, denting GDP growth by 1.04 percentage points, they said.
That is because more than half of China’s exports to the US, equivalent to about US$127.1 billion of goods, could be replaced by goods from other countries, which translates to an equivalent reduction in China exports to the US, Liu told a media briefing in Hong Kong.
There are worrying signs already visible in leading indicators of the job market, such as a worsened purchasing managers-employment index, increased unemployment benefit claimants and a decline in urban household confidence in current and future employment sentiment, Liu said.
Yet, looking ahead, Liu said that the trade war would help accelerate the growth and opening-up of the Chinese economy and capital markets in the long run, despite the short-term pain, citing a land leasing title reform in rural parts of the country that has become more urgent given the trade war.
“We believe this reform could be the most effective policy response to mitigate the trade war shock to the Chinese economy, as it could potentially bring about a US$20.6 trillion wealth effect to rural families,” the report said.
Liu said that the boost in rural consumption, particularly in auto purchases, could be more than sufficient to neutralize the lost exports to the US.
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