ING anticipates US tariffs will impact China’s GDP not as significantly as expected, forecasts 4.6% annual growth; trade talks may begin in early April: the bank

Earlier this month, US President Donald Trump announced a 10% tariff on Chinese imports, sparking market discussions over the actual impact on China's economy. Lynn Song, Chief Economist, Greater China, ING, believes that Canada and Mexico will soon reach an agreement with the US on fentanyl and border issues, indicating that Trump sees tariffs as a negotiation tool rather than an ultimate goal. Lynn is confident that China and the US can also lower tariffs through negotiations, and predicts that the tariffs on China will not increase by 60%. 

Meanwhile, since the latest round of tariffs, low-end manufacturing industry in mainland China has begun shifting overseas. Lynn believes that the impact of tariffs on China’s economy will ultimately be more optimistic than market expectations. He estimates that it will only slow China’s GDP growth this year by 0.4% to 0.8%, with annual GDP growth predicted to be 4.6%. 

Last year, mainland China’s exports grew by 5.9% year-on-year, contributing 1% to GDP growth. ING expects year-on-year growth will drop to low single-digit growth or remain flat this year. Lynn said that the 10% tariff will inevitably reduce some exports to the US. However, he holds the view that China and the US have room to negotiate on issues such as fentanyl and that it would be beneficial for both countries to reach an initial agreement. He expects that the earliest time window for the talks will be in early April, coinciding with the expiration of TikTok's sale deadline and the expected release of the US report on the implementation of the first phase of the 2020 trade agreement. In 2020, China signed the first phase of the trade agreement, promising to increase imports from the US between 2020 and 2021 by USD200 billion compared to the 2017 benchmark, but ultimately fell short of its goal. 

Tariffs are inevitable, though likely not a 60% increase 

According to Lynn, the COVID-19 pandemic broke out shortly after the agreement was signed, affecting mainland China's import capacity. Yet, after 2022, overall imports of goods and services from the US to mainland China rebounded, with agricultural products and energy imports consistently exceeding 2017 levels since the agreement. Imports of service have also been recovering, while imports of manufactured goods have been under 2018 levels due to supply chain de-risking and restrictions on exports of semiconductors. While the agreement expired in 2022, Lynn sees a chance for a new agreement. However, tariffs hold significant importance in Trump's economic philosophy, and with many China hawks in the new administration, he believes that the US imposing tariffs on China is inevitable. Nonetheless, he expects that at least this year, Trump will not implement the previously proposed comprehensive 60% tariff increase. 

Chinese companies will continue to set up overseas factories and export semi- products 

In response to US tariffs, some mainland China’s manufacturers have set up factories in Mexico, ASEAN countries, and Eastern Europe in recent years to export semi-products and machines to these locations. Yet, with Trump recently including Mexico in the tariff scope, there is a possibility of tariffs being imposed on goods imported from multiple countries. Lynn notes that the indirect impact on mainland China’s exports will depend on how these tariffs are implemented. Although there may be marginal short-term effects, the products manufactured abroad by mainland China companies target markets beyond just the US, including Europe and the Middle East. In addition, the expansion of tariffs by the US will also encourage local areas to strengthen trade relations with China. Therefore, the trend of mainland China companies setting up factories overseas and exporting semi-finished products and machinery will continue. 

RMB not expected to depreciate deliberately to resist tariff impact 

RMB has been under pressure recently due to tariffs, with onshore RMB dropping to 7.33 last month, approaching the 16-year low of 7.35. Lynn expects the fluctuation of RMB this year will range from 7 to 7.4, which is stronger than the market's expectation of 7.5 to 7.6. He believes that the People's Bank of China (PBOC) will not deliberately offset the impact of tariffs with depreciation because the US might eventually increase tariffs again accordingly. Therefore, a depreciation of the RMB will not be of much effect, but the PBOC’s efforts to maintain a stable exchange rate will enable RMB to be more widely utilized for trade settlement and maintain its purchasing power over imports, which is beneficial to domestic demand. 

Originally published in Ming Pao: Opens in a new tabhttps://news.mingpao.com/pns/%E7%B6%93%E6%BF%9F/article/20250217/s00004/1739725513847/ing