One thing seems pretty clear from the outcome of the US election – it’s not going to be ‘business as usual’ – for anyone. Trump’s campaign promises had many economists scratching their heads as to whether tariffs would be inflationary and whether Elon Musk’s planned austerity cuts would be good or bad.
For now, prior to Trump taking office again, there are still questions as to what will be implemented and what might fall by the wayside.
Plans to impose tariffs, weaken the EPA (drill, baby, drill) and a promise to cut energy bills in half all have the potential to impact everyone, everywhere. To what extent is the big unknown, hence why some investors are looking again to gold as a safe haven as well as alternative currencies such as Bitcoin.
China was very much in focus during the election, with Trump singling it out for the highest tariffs, with the actual number somewhere between 60% and 1,000%, depending on the day and audience of his rallies. Regardless of who is going to pay the tariffs (US consumers), China is likely to suffer to some degree.
UBS economist Tao Wang estimates that US tariffs on China could slice 1.5% to 1.75% off GDP growth and “also lead to significant closing of businesses and loss of jobs”.
Which is what made last week’s stimulus package by Beijing land like a sack of potatoes. Instead of revving up construction of new projects, a major part of the $2.5 trillion plan was a debt swap plan for local Governments. It’s no wonder the Aussie markets pushed down the Australian iron ore producers.
However, this might only be half the story.
As part of a recent tour of China for macroeconomists, Goldman Sachs’ chief China economist, Hui Shan, gave a few reasons why China might be playing a long game.
Stimulating consumption/ spending has been tricky to get right as cash payments to those in the cities tends to get saved, rather than spent (which was similar to what occurred with Covid stimulus cheques in Australia).
Getting local Governments to invest in infrastructure is a challenge due to banks being unwilling to lend and limited revenue sources.
Shan noted that debt, demographics and disinflation have long been the three Ds hanging over the Chinese economy, however there is now a fourth – Donald Trump.
She believes that the Chinese have learnt from Trump 1.0 and will not pre-emptively move ahead of the proposed tariffs. If there is to be a trade war or retaliatory action of some sort, China will take a considered position.
With a property sector that is already in a weakened position, just ‘building things’ is not going to fix the problem.
How and when China responds is anybody’s guess.
Trump gave the impression to voters that the US holds all the cards and can do whatever it likes, without consequences. However, China has quite a few levers that it can pull to exert its own response, particularly with regards to critical minerals and other areas that require either a long time or dedicated technology to replicate elsewhere.
All in all, it’s going to be interesting times ahead.
Photo by Li Yang
