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Trade war

US-China trade friction becoming a concern

Nikkei-surveyed economists expect China to grow at 6.5% pace in 2018

HONG KONG -- Trade friction with the U.S. is starting to cast a shadow on China's economic outlook. In a Nikkei and Nikkei QUICK News survey of economists who specialize in China, the top answer regarding possible downward risk factors is a trade war between the two countries.

The survey was conducted between March 15 and 23, well after the Trump administration announced tariffs on steel and aluminum imports on March 8. Tension between the U.S. and China heated up when the U.S. also unveiled plans for tariffs targeting additional Chinese goods on March 22.

The results point to a big task ahead for Chinese President Xi Jinping's new administration: economic diplomacy with the U.S.

U.S. President Donald Trump and his advisers have decided to curb imports of steel and aluminum products to reduce their country's massive trade deficit. Washington is also considering whether to levy further economic sanctions on China in regard to that country's serial infringement of intellectual property rights. The sanctions would be based on Section 301 of the 1974 Trade Act.

"China also has leverage over the U.S.," said Arjen van Dijkhuizen, senior economist at ABN Amro Bank. "And it is not in the interest of U.S. (companies) to go too far. However, uncertainty remains and risks of an escalation have risen."

Kenny Wen, a wealth management strategist at Everbright Sun Hung Kai, is also concerned. "If the impact of Section 301-based sanctions becomes stronger, trade friction could be a major variable on the market."

The Chinese economy has been supported by solid overseas demand, and protectionism could bring downward pressure. "Even though the global economy has been bottoming, the external environment remains highly uncertain, especially amid rising protectionism, the gradual change of monetary stances among the major central banks in the world, huge financial market volatility, geopolitical issues, Brexit negotiations, etc.," said Ricky Choi, senior economist of the Economic Research Division at Bank of China (Hong Kong).

Few of the economists expect the world's two biggest economies to allow matters to escalate into a full-scale trade war. "A trade war will be a lose-lose proposition for both sides," said Aidan Yao, senior emerging Asia economist at AXA Investment Managers Asia. "China will try to manage the relationship by offering more carrots (opening up its market/economy) than sticks (retaliation)."

Susan Joho, an economist at Julius Baer, also sees a trade war as unlikely. "We currently attach a 75% probability to continued trade quarrels and only a 20% chance to a trade war," she said.

The economists' average estimate for China's gross domestic product growth in the first quarter of 2018 is 6.7%, slightly lower than the 6.8% expansion for the fourth quarter of 2017. For the full year, they expect GDP to grow at a pace of 6.5%. For 2019, they project 6.3% growth.

"We look for increasing headwind against real estate and infrastructure investments as Chinese authorities step up efforts in mitigating risks, especially in the financial sector," said Shen Jianguang, chief China economist at Mizuho Securities Asia.

Shen expects the Chinese economy to expand 6.3% in 2018. Many respondents cited monetary tightening and real estate market adjustments as possible risks aside from a trade war.

The economists forecast that the dollar will be quoted at 6.45 yuan at the end of 2018, up 0.9% from the beginning of the year. Many think U.S. rate hikes will be a potential factor for a weaker yuan, but Chinese authorities will intervene in the market to stem capital outflows. The average projected exchange rate against the dollar is 6.5 yuan at the end of 2019 and 6.44 yuan at the end of 2020. The economists expect the rate to move within a narrow range.

The Chinese currency strengthened about 6% against the dollar in 2017.

The People's Bank of China is largely expected to continue policies that lean toward monetary tightening. Zhou Xiaochuan in March stepped down as central bank governor, a position he had held for about 15 years. His successor, Yi Gang, is expected to maintain the bank's overall policy direction. Some of the survey respondents said the central bank will slightly raise its policy rate when supplying funds to the market to cope with U.S. rate hikes and debt issues at home.

Xi Jinping speaks at the closing session of the National People's Congress in Beijing in March.   © Reuters

The National People's Congress in March voted to scrap the term limit for president, helping Xi further concentrate political power. Many respondents expect this to help speed up reforms.

"This concentration of authority could allow the president to pursue his long-term initiatives more persistently, including the Belt and Road Initiative, financial de-risking, Made in China 2025 and Artificial Intelligence 2030," said Yao Wei, China economist at Societe Generale Corporate & Investment Banking.

Fan Xiaochen, a director at MUFG Bank, said that with more power in Xi's hands, there should be less resistance to financial and tax reforms.

Some see Xi's power grab in a lesser light. "In the near term, we think that Xi's consolidation will help accelerate reforms in China," said Sukumar Rajah, senior managing director and director of portfolio management at Franklin Templeton Investments. But "in the broader term, we are concerned that the removal of term limits could be detrimental to the robustness of the overall political system, given the diminished scope for diverse opinion and debate."

As for which of the priorities identified at the NPC they think will most impact economic growth, "deleveraging" was the most popular answer. The economists are aware that rising financing costs and a crackdown on so-called "shadow banking" can act to prevent the spread of investments throughout the financial market.

The economists who responded to the survey are: Arjen van Dijkhuizen, senior economist, ABN Amro Bank; Raymond Yeung, chief economist, greater China, ANZ Bank; Aidan Yao, senior emerging Asia economist, AXA Investment Managers Asia; Ricky Choi, senior economist, economic research division, Bank of China (Hong Kong); Richard Jerram, chief economist, Bank of Singapore; Peter So, managing director and co-head of research, CCB International Securities; Li-Gang Liu, chief China economist, Citigroup Global Markets Asia; Xie Yaxuan, China Merchants Securities; Qun Liao, chief economist and general manager of research China, CITIC Bank International; Kevin Lai, Daiwa Capital Markets; Chris Leung, executive director and chief China economist, group research, DBS Bank (Hong Kong); Sean Taylor, chief investment officer, Asia Pacific, Deutsche Asset Management Deutsche Bank; Kenny Wen, wealth management strategist, Everbright Sun Hung Kai; Sukumar Rajah, senior managing director, director of portfolio management, Franklin Templeton Investments; Song Yu, chief China economist, Goldman Sachs; Thomas Shik, chief economist, head of economic research, Hang Seng Bank; Haibin Zhu, chief China economist, J.P. Morgan; Susan Joho, economist, Julius Baer; Larry Hu, head of China economics, Macquarie; Shen Jianguang, chief China economist, Mizuho Securities Asia; Robin Xing, chief China economist, Morgan Stanley; Fan Xiaochen, director, MUFG Bank; Xu Jianwei, senior economist, Greater China, Natixis; Yang Zhao, chief China economist, Nomura; Yao Wei, China economist, Societe Generale Corporate & Investment Banking; Wang Jian, Macro Analyst, SWS Research; Tao Wang, head of China economic research, UBS.

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