BREAKINGVIEWS-China’s economy sails into dense trade war fog

By Hudson Lockett

HONG KONG, May 6 (Reuters Breakingviews) - Donald Trump is not alone in his capacity to ignore reality: last week, Zhao Chenxin, vice chair of the National Development and Reform Commission, said Beijing was “fully confident” in hitting its yearly growth target of about 5%. That came days after the International Monetary Fund slashed its forecast for China’s growth this year to 4% due to triple-digit U.S. levies on Chinese exports.

That’s grim news for China’s manufacturers, which shipped out $524 billion-worth of goods last year to America, per Chinese customs figures, or about 3% of GDP. But the reality could prove worse depending on how U.S. trade deals with other countries shake out, thanks to the first trade war spurring Chinese manufacturers to reconfigure their shipping and supply chains. That makes the damage of the second far harder to predict.

Solar panels offer a case in point. American officials have accused Chinese firms like Jinko Solar 688223.SS and Trina Solar 688599.SS of shipping their products through Southeast Asia for "minor processing" before exporting to the U.S. to avoid tariffs. The scale of this so-called transhipment, both legal and illegal, is probably sizable: the ASEAN bloc now accounts for the largest share of China's exports, at 16.4% last year, with intermediate goods making up the bulk of those flows. Moreover, the value of major Chinese FDI transactions in the region has averaged $10 billion over the past three years, according to research outfit Rhodium Group, with more than half going to manufacturing in 2024.

What is clear, at least, is that Trump's administration is cracking down on such shady shipping. Washington, for example, is planning levies of up to 3,521% on solar panels from four Southeast-Asian countries. Under what Goldman Sachs analysts describe as an “extreme assumption” — in which the fall in Chinese exports to the U.S. since 2017 is ascribed entirely to such rerouting — China's growth could take another 1.7 percentage point hit should those flows be cut off.

The actual impact would probably be smaller, but it’s telling President Xi Jinping’s first post-tariffs foreign tour included high-profile visits to Vietnam and Cambodia — both of which have come under scrutiny for enabling Chinese transhipments. And Reuters has reported, Vietnam is already prepared to crack down on such activity if it means avoiding Washington's 46% duties currently slated to take effect in July.

And all this doesn't even factor in the impact of a U.S. recession on China and its suppliers abroad. The single greatest source of clarity on China’s economy would of course be a rough timetable for a trade pact with Washington, but recent tariff carve-outs on both sides for key sectors may sap the impetus for a quick deal. If Beijing’s growth targets must normally be taken with a grain of salt, this year’s requires a whole shaker.

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CONTEXT NEWS

Zhao Chenxin, vice chair of the National Development and Reform Commission, said on April 28 that China could go without agricultural and energy imports from the U.S., per the Financial Times, adding the country’s top leaders were "fully confident” in hitting their 5% yearly growth target even as “external shocks were increasing”.

Economists have cut estimates for Chinese growth sharply since the mutual imposition of triple-digit export tariffs with the U.S. in early April, with the IMF last week cutting its 2025 growth forecast for the country by 0.6 percentage points to 4%.