Investing.com – In a note sent to clients on Wednesday, Citi economists discussed the potential impact of a 60% tariff on Chinese goods entering the U.S. market, a move that has drawn attention following the projection of the Donald Trump’s victory in the presidential elections.
The report highlights that such a tariff could lead to a significant reduction in Chinese exports to the US, which could decrease China’s GDP growth by approximately 2.4 percentage points in an extreme scenario.
However, Citi believes that a universal 60% tariff is more likely a negotiating tactic than an imminent policy change.
“In our opinion, the proposal for a 60% universal tariff seems more like a bargaining chip than a real risk,” economists led by Xiangrong Yu said in the note.
They anticipate a more realistic scenario in which the effective tariff could increase by an additional 15%, which would have a minor impact on China’s GDP, reducing it by between 0.5 and 1.5 percentage points depending on trade diversion effects.
The firm also speculates on China’s possible responses to a high tariff rate. Citi suggests that Chinese authorities are unlikely to respond to pre-election rhetoric, but could allow the RMB to depreciate between 7.7 and 8.0 if a 60% tariff is implemented.
Initially, the People’s Bank of China (PBoC) could defend the currency to manage market expectations and bilateral trade imbalances. Additionally, Citi expects China to continue focusing on technological advancements rather than resorting to countercyclical measures.
As for the ongoing meeting of the National People’s Congress Standing Committee (NPCSC), Citi does not believe it will be greatly influenced by the outcome of the US election.
The meeting agenda mainly focuses on China’s 2024 fiscal support and risk resolution strategies, which are driven by domestic concerns such as growth target, slowing property market, deflation and weak consumption.
While external uncertainties may generate additional domestic support, Citi considers immediate political reactions to the US elections unlikely.
“The CEWC (Central Economic Work Conference) in mid-December might be a better place to assess the impact of the US elections,” the strategists said.
Citi anticipates that the NPCSC will focus on resolving risks rather than stimulating demand. The committee has discussed a new round of debt swaps and may provide more details later.
Although the Ministry of Finance has recycled an unused local government bond (LGB) quota of RMB 400 billion, Citi does not expect a significant revision of the overall deficit target of 3% of GDP.
Looking ahead, the Wall Street firm suggests it is too early to rule out the possibility of substantial stimulus by 2025. They maintain a base case for a fiscal deficit of around 3.8% of GDP in 2025, regardless of the scenarios. tariffs.
However, if a 60% tariff were enacted, fiscal stimulus “could be further intensified and focused more on final demand like consumption and property, in our view,” the strategists said.
“The RMB 10 trillion stimulus that top political advisors like Liu Shijin have advocated would be more plausible and likely in the face of further trade headwinds,” they added.