|DEEPDIVE10/06/20191XDChen,ChiefChinaEconomist|JacquelineRong,SeniorChinaEconomist|BNPParibasChinaLimitedBeijingBranchDEEPDIVE|CHINA10June2019China–PolicyresetforprotractedtradetensionsKEYMESSAGESInourview,ChinaispreparingitselfforprotractedtradetensionswiththeUS.WeexpectChineseauthoritiestorespondtoadditionaldownwardgrowthpressuresthroughbothshort-termstimulusandlonger-termreforms.Longer-termmeasuresarelikelytofocusonreformingandopeninguptheeconomytodriveupgrowthpotentialindomesticdemand.WhileChinaisturningtoshort-termmonetaryandfiscalstimulustocounterdownwardpressureonitseconomyfromhigherUStariffs,weseeevidencetosuggestChineseauthoritiesarecontemplatingtheprospectofaprotractedtradedisputethatwouldrequirethemtoreorientpolicytounleashthepotentialindomesticdemand.Thebilateraltradetalksseemtobeatanimpasse.EventhoughPresidentDonaldTrumpandPresidentXiJinpingarebothgoingtoattendtheG20summitinOsakaon28–29June,ourbasecasecontinuestobethattherewillbenodealstruckinthenearterm.Thegapsrevealedbythetwosidesseemtotoovasttobeaddressedinthenearterm,inourview,andtherecentexportbanimposedbytheUSonHuaweihasfurtherescalatedthetensions.Basedonourobservations,anincreasingnumberofChineseofficialsbelievethetensionshavegonebeyondatrade‘war’toatechnologywarandriskextendingintoafinancialoreconomicwar.Ifwhatisatstakeisinfactanewworldorderandgloballeadership,sotheargumentgoes,thencanthecurrentconflictberesolvedwhileChina’sglobaleconomicandpoliticalpowerincreases?Inourview,China’sofficialstancehaschangedsubstantially,fromanactive,eageranddecisiveapproach,confidentinreachingatradedealwiththeUS,toapositionthatismorepassive,reluctantandsuspicious.OfficialshaveemphasisedbothawillingnesstonegotiatewiththeUS,providedcertainpreconditionsaremet,andareadinesstoretaliateagainstUSmeasures.Againstthisbackdrop,wethinkChinawillcontinuetotakerelativelysoftmeasuresinretaliationagainstUSpressure.However,intheeventoffurtheractionthathurtsitsinterests,Chinamight,forexample,imposerestrictionsofrare-earthp...
