BREAKINGVIEWS-China will struggle to deal with its overcapacity

By Ka Sing Chan

HONG KONG, April 8 (Reuters Breakingviews) - China’s exports will be squashed by Donald Trump’s tariffs, regardless of whether the U.S. president hits them with an extra 50% levy as he threatened on Monday. The problem for Beijing is that consumers in the People's Republic will need a lot more government support to absorb some of the slack.

The Asian behemoth's annual exports to the U.S. are worth $525 billion and China produces about 30% of the world’s manufactured goods, per the World Bank. Yet it only accounts for 13% of global consumption as of 2023. The imbalance endures despite pledges by party officials to restructure the economy away from an investment-led growth model.

Now Beijing's strategic response to the U.S. assault could add pressure: To support the positioning of itself as a defender of global trade, the People’s Republic may act quickly to lower its trade barriers with non-U.S. economies. That would send a message that China doesn't intend to flood the world with more subsidised stuff like steel, batteries and solar panels. Such opening up also could support deeper trade ties with the European Union and force further industrial upgrade.

Holding back on exports, which contribute about 20% of Chinese GDP, will increase the domestic pain President Xi Jinping needs to address. His administration has been preparing for the challenge, emphasising the need to boost demand in its $18 trillion economy in recent policy meetings.

The latest situation calls for more aggressive fiscal policies. UBS analysts expect Beijing may need to increase broad spending by 1.5% of GDP, or $270 billion, to achieve economic growth of 4% in 2025, below China's official 5% target. But the fiscal space is limited. Ratings agency Fitch downgraded China's sovereign credit rating last week, citing concerns that explicit Chinese debt can rise to 74.2% of GDP in 2026 from 60.9% last year.

There are other things China can do: Beijing has pledged to take on a "moderately loose" monetary policy for the first time in 14 years. The state-run People's Daily also suggested in a front-page editorial on Monday that the central bank may lower interest rates to boost demand.

Of course, turning conservative savers into enthusiastic spenders will be challenging, especially while China's property market is still finding a bottom. Still, it is probably just as hard, if not harder, for the U.S. to remake itself as an industrial manufacturing powerhouse.

CONTEXT NEWS

China said it will never accept the "blackmail nature" of the United States after President Donald Trump escalated tariff threats, the Chinese commerce Ministry said on April 8.

Trump said on April 7 that he will impose an additional 50% tariff on China if Beijing does not withdraw its retaliatory tariffs on the United States.