汇丰银行-中国-宏观策略-贸易战：中国的制胜之道-2019.6-39页 (2).pdf

Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of Trade WarJune 2019Economics/ChinaPlay interview withQu HongbinBy:Qu Hongbin,Julia Wang,Jingyang Chen,Erin Xin and Tony ZhouEconomicsChinaJune 2019Trade WarA winning strategy for ChinaRetaliation aside,stepping up stimulus to reflate domestic demand holds the key to mitigating the impact of tariffsAccelerating structural reforms to create a level playing field would revitalise the private sectorChina should further open up its economy in order to climb the technology ladder 1 Economics China June 2019 A winning strategy with three arrowsPotential impact of trade war on Chinas headline GDPChina should speed up structural reformsto boost economic growth.Reflating domestic demandSource:HSBC estimatesCould translate into a0.3-0.5ppt lossin headline GDP growth in thenext 12 monthsChina should target morestimulative monetary and fiscalpolicies:Monetary policiesFiscal policiesRecent increase of tariff from10%to 25%on USD200bnof Chinese productsIf the US slaps a 25%tariff on the rest of ChinasUSD300bn exports to the USGeneral RRR cutThrough householdregistration,urbanmigrants are ableto free up funds forconsumptionCompetitiveneutrality levels theplaying fieldbetween SOEs andthe private sectorIntellectualproperty rightsprotection supportsinnovation-ledgrowthDiversify Chinastrade relations-EM Asia will be akey beneficiaryDeepen relationswith moredeveloped marketsoutside the USImprove businessenvironment andattract high qualityforeign-directinvestmentTargeted RRR cutTargeted Mid-termLending FacilityValue-added tax cutCorporate income tax cutBoosting infrastructureinvestment.to open up and deepen trade andinvestment relations with other economiesCould translate into a1.1-1.2ppt lossin headline GDP growth in thenext 12 months Economics China June 2019 2 All eyes will be on the G20 meeting in Osaka,Japan on 28-29 June to see whether China and the US can reach some form of agreement on trade,or at least agree to keep talking.We hope this report has a longer shelf life.It assesses the potential near-and medium-term impact on Chinas economy under different tariff scenarios and what Beijing is likely to do in response.We think a winning strategy will have three arrows reflation,reform and opening up that would bring long-term benefits to Chinas economy.War wounds Despite the possibility of a truce at the G20 summit,China-US trade tensions are weighing on exports,investment and productivity growth in China.Retaliation aside,we believe Beijing will respond by:1)stepping up policy easing to reflate domestic demand;2)pushing ahead with structural reforms aimed at levelling the playing field for the private sector Chinas main growth driver;and 3)opening the countrys economy by diverting exports away from the US and climbing up the technology ladder.The trade war is likely to affect China through multiple channels.The recent increase of tariffs to 25%from 10%on USD200bn of Chinese products,if permanent,could cut growth of Chinas total real exports by 1.7-2.8ppt in the next 12 months,lowering Chinas real GDP growth by 0.3-0.5ppt.If the 25%tariff is extended to the rest of Chinas exports to the US(USD300bn),as threatened,its impact would be much bigger,around 6.3-6.8ppt on total real exports and 1.1-1.2ppt on real GDP,by our estimates.In this scenario,firstly,we believe Chinas GDP growth would slip below 6%,even though policy easing would be stepped up to reflate domestic demand to help offset some of the impact.Secondly,if trade tensions do not ease soon,business confidence and investment could be greatly affected.This would slow down investment demand in the near term and productivity growth in the medium term.Thirdly,the US move to put several Chinese high-tech firms on export blacklists is starting to cause disruptions to the supply chain of electronics and other products.The anticipated 40%drop in Huaweis smartphone sales in overseas markets after being blacklisted shows the severity of the disruptions(Bloomberg,17 June 2019).The damage would be even greater if the trade war drags on.This means that Chinese policymakers will want to continue the trade negotiations to resolve the dispute sooner rather than later.There are several sticking points that will not be easy to resolve,but an amicable Xi-Trump meeting at the G20 summit would be a window of opportunity for moving closer to a deal.Meanwhile,we believe Chinese policymakers will try to reach an agreement while working out how to adjust domestic policy in order to cope with prolonged trade tensions.Executive summary Trade tensions are weighing on exports,investment and productivity growth in China There are still several sticking points 3 Economics China June 2019 So,what can they do and what is likely to happen?We believe that a policy package with three arrows reflation,reform and opening up can help China to navigate through uncharted waters and put the economy on a steady and sustainable growth path in the coming years.1,Reflation We believe stepping up policy easing to stimulate domestic demand is the best way to offset a negative demand shock caused by the tariff war.In fact,Beijing has already launched a number of fiscal and monetary stimulus measures since the start of the year.And yet“there is still enormous room for stepping up both fiscal and monetary easing”,as the Peoples Bank of China(PBoC)Governor Yi Gang stated recently(Bloomberg,7 June 2019).Corporate VAT rates were lowered 3ppt to 13%for manufacturing and 1ppt to 9%for additional categories(construction,real estate,and transportation)in April.We believe there is still room to cut the 13%VAT for manufacturing to 9-10%and lower corporate income tax from 25%to 20-22%.Despite the recent cuts,the social security tax on Chinese corporations is still one of the highest in the world.Thus,lowering social security taxes is also an effective policy tool to revitalise business investment.Further tax cuts can be funded by a combination of deploying unused fiscal deposits and a bigger fiscal deficit(still below 3-4%of GDP).In addition,Beijing has already increased the quota for special bond issuances to support local government infrastructure spending.We expect this to be stepped up when necessary.Monetary easing so far this year has been focused on lowering reserve ratios to increase the loanable funds and pushing banks to channel the new funds into the more efficient private corporate sector.More can be done though given still high reserve ratios and the private sectors credit constraints.Here,providing incentives and putting more pressure on banks to increase lending to the private sector hold the key.This will not only help lift private investment,but also improve the efficiency of credit allocation.Meanwhile,the Feds dovish stance also leaves more room for the PBoC to lower interest rates when necessary.Greater RMB flexibility is a feasible option for cushioning the growth slowdown,but a big depreciation would be counterproductive and hence unlikely.2,Reform Reflation alone is not enough.China should accelerate structural reforms to maintain steady growth in the coming years.Reforming industrial policies,SOEs and market regulations based on competitive neutrality principles are crucial to creating a level playing field for all firms.This,in turn,holds the key to unclogging the major bottlenecks for the expansion of the private corporate sector.These reform measures were highlighted as a top priority in Premier Lis Government Work Report delivered to the National Peoples Congress(NPC)in March.Implementation is the key.As we argued earlier(Chinas dual-track economy:The 70-30 split,29 May 2017:China innovation:Punching above its weight,10 October 2017),the private sector is Chinas main growth engine,accounting for over 80%of urban employment,70%of patenting activity and 70%of GDP growth.So,removing these bottlenecks can revitalise the private sector and therefore boost consumption,investment and productivity growth in the coming years.3,Opening up The third arrow of a winning strategy is further opening up.This is not only because reform and opening up go hand in hand in China as they reinforce each other,but also because further opening up at this juncture helps China to win more friends.Strengthening cooperation with other economies can help China to divert exports away from the US to other markets.More importantly,this would help Chinese firms to climb the technology ladder.Innovation is not about reinventing the wheel in an isolated environment.Any innovation has to be based on the worlds existing technology and further improving it.Although China has risen rapidly up the ranks in terms of innovation capacity in recent years,cross-border cooperation is still critical for China to continue to climb the technology ladder in the coming years.There is still enormous room for stepping up both fiscal and monetary easing Monetary easing this year has focused on lowering reserve ratios Reflation alone is not enough Cooperation with other economies can help China to divert exports from the US Economics China June 2019 4 Executive summary 2 The trade war bites 5 China-US trade tensions have taken a toll on economic growth 5 Trade diversion and supply chain relocation 6 Technological rivalry is more of a concern 11 Reflating domestic demand 13 Lowering corporate tax 13 Credit easing targets the private sector 14 Issuing more special bonds to finance infrastructure investment 16 Focusing on ICT and green investment 16 Speeding up structural reforms 18 Structural reform unlocks domestic demand 18 Competitive neutrality key to revitalising the private sector 19 Intellectual property rights protection essential for innovation 22 The private sector benefits from successful and faster reform 25 Further opening up 27 More diversification 27 Deepening global innovation 29 Becoming a more attractive FDI destination 31 Key recent publications 33 Disclosure appendix 34 Disclaimer 36 Contents 5 Economics China June 2019 China-US trade tensions have taken a toll on economic growth Although there was some“front-loading”after the trade tensions were first felt in 2018,Chinas trade with the US has slowed significantly since the 10%tariff on USD200bn of China imports took effect in September 2018(see Chart 1).In the first five months of 2019,Chinas exports to the US contracted by 9%y-o-y,creating a material drag on total export growth.Faltering global demand and suppressed business sentiment added to the weakness in export growth.As we can see in Chart 3,even the remaining China exports to the US that have not been tariffed(the grey line)have been growing at a slower pace since late 2018.Chart 1:China export growth by destination Chart 2:Import growth decelerating at a faster pace than export growth Source:CEIC,HSBC Source:CEIC,HSBC Meanwhile,Chinas import growth has been decelerating at an even faster pace(see Chart 2).In particular,purchases of capital goods such as mechanical and electrical equipment and intermediate goods have shrunk significantly,pointing to a potential future slowdown in manufacturing production in some externally-oriented sectors.The tariffs,if here to stay,are likely to continue to suppress trade growth.The recent increase in tariffs from 10%to 25%on USD200bn of Chinese products could cut Chinas total export volume by 1.7-2.8ppt in the next 12 months,which would translate into a 0.3-0.5ppt loss in headline GDP growth,on our estimates.If the US slaps 25%tariffs on the rest of Chinas-40481216Mar-17Sep-17Mar-18Sep-18Mar-19ASEANEUUSJapanSouth KoreaHong KongOthersGrowth(%y-o-y)Contribution,ppt-40-20020406080-40-2002040608007 08 09 10 11 12 13 14 15 16 17 18 19YoY%,3mmaYoY%,3mmaExport growthImport growthThe trade war bites Trade tensions have taken a toll on exports and economic growth in China,and will likely remain as a major challenge ahead Supply chain relocation should hurt GDP growth and employment,but“pull”factors may incentivise manufacturers to stay in China Prolonged technological rivalry could be more disruptive,as it would slow the technology“catch-up”process as well as productivity growth Chinas trade with the US has slowed significantly since late 2018 The tariffs,if here to stay,are likely to continue to suppress trade growth Economics China June 2019 6 exports to the US,then the impact on total exports in volume terms could be 6.3-6.8ppt,which would lead to around 1.1-1.2ppt loss in headline GDP growth.But the actual loss to GDP could be smaller,as we expect Beijing to step up stimulus to reflate domestic demand,which can partly offset the negative impact from the trade war.The door for negotiating a trade deal to de-escalate the tariff war is still open,but the gap between the two sides is substantial.The recent move by the US to put Chinese technology companies on a blacklist is even more worrying.Rising risks for a prolonged economic and technological rivalry between China and the US may have meaningful implications on Chinas economic growth in the medium to long term.Chart 3:China shipments to the US of items on US tariff lists Source:United States International Trade Commission(USITC),HSBC Trade diversion and supply chain relocation As US imports from China drop,there is evidence of“trade diversion”to other countries.We compare growth of US imports from China and the rest of world for items covered in four US tariff lists.For items that are covered in the first USD34bn tariff list which took effect from 7 July 2018,the import substitution effect has become quite obvious.US imports from other countries have been rising at a faster pace,making up for part of the drop in imports from China(see the first chart in Chart 4).The breakdown shows that the US has been importing more labour-intensive products such as furniture and garments from countries such as Vietnam and India.For products such as mechanical appliances and electrical machinery,the US has been purchasing more from places such as Mexico,Japan,Korea,and the European Union.If the US tariffs are here to stay over the medium term,a key risk is that manufacturers may reshuffle their production to other countries in order to get around the tariffs.The market has been concerned that this may create a significant loss in Chinas GDP growth over the medium term.We provide an analysis here to measure the trade wars potential impact on manufacturing supply chains in China.-40-30-20-10010203040-40-30-20-10010203040Jul-17Sep-17Nov-17Jan-18Mar-18May-18Jul-18Sep-18Nov-18Jan-19Mar-19USD 200bn tariff listThe remaining China exports to the USUSD 34bn tariff listUSD 16bn tariff listUSD 34bn list effective on 7 JulyUSD 16bn list effective on 23 AugUSD 200bn list effective on 24 Sep%y-o-yy-o-y%There is some evidence of“trade diversion”to other countries We measure the scale of potential supply chain reloca