[WORLD] China said its policy instruments are ready in reaction to Washington's "reciprocal tariff" blitz last week, demonstrating confidence as the country strives to boost market and investor optimism. While the Communist Party's official publication struck a confident tone in an opinion piece Sunday evening, investment banks such as Morgan Stanley and UBS have anticipated that China's central bank will announce rate cuts and increase fiscal expenditure soon.
The party had already anticipated this new round of American economic suppression, has thoroughly assessed its potential impacts and prepared contingency plans with sufficient buffers and policy flexibility.
Morgan Stanley has projected that China will introduce a fiscal stimulus package amounting to 2 trillion yuan, with the initial details possibly being unveiled at a press conference by the National Development and Reform Commission on October 8. This plan may encompass support for local government financing, infrastructure capital expenditure, moderate consumption stimulus, and/or bank capital restructuring. Market feedback suggests that the scale and timing of the stimulus package are likely to be positively evaluated by domestic investors, as they reaffirm Beijing's commitment to driving economic recovery through more coordinated policy efforts.
“Going forward, monetary policy tools such as reserve requirement ratio cuts and interest rate reductions can be deployed at any time as needed.”
China's "mega-sized economy" is capable of withstanding the pressure. Beijing has already committed to increasing expenditures through an increase in the official budget deficit ratio, and the commentary mentioned the growth of additional mechanisms, including special bonds.
Policies to promote consumption, the stock market, and the sectors most affected by US tariff hikes will be unveiled in the future. According to UBS, the latest tit-for-tat tariff hikes might reduce China's GDP growth by about 1.5 percentage points, with a comparable reduction expected in the US economy. To make up for the shortfall, China would need to increase overall fiscal spending by 1 to 1.5 percentage points of GDP.
“We must double down on domestic demand, making consumption both the growth driver and stabiliser and capitalising on its vast market scale … We must prepare fully to mitigate potential impacts.”
On Wednesday, US President Donald Trump announced a broad set of retaliatory tariffs, increasing import charges on nearly all American trading partners. China had a 34% increase, resulting in an effective rate of 65 percent or more when additional increases are considered.
Beijing responded with an equivalent 34% increase in tariffs on all US exports, which will go into effect on Thursday, as well as new trade restrictions on certain American firms. "We expect that the cumulative US tariffs will have a significantly bigger negative impact on growth than in 2018 and 2019. "Beijing is likely to accelerate planned stimulus measures and introduce new easing soon, but these may not fully offset the tariff drag," said Robin Xing, chief China economist at Morgan Stanley.
UBS predicted that the central bank might reduce the reserve requirement ratio for commercial banks and lower interest rates over the following two months, resulting in a policy rate decrease of at least 0.3 or 0.4 percentage points this year.
China's policy actions aim not only to mitigate the immediate effects of tariffs, but also to promote long-term economic resilience. The emphasis on local demand and consumption as development drivers is consistent with China's overall aim of minimizing its reliance on external markets and increasing economic self-sufficiency. This strategy is expected to be bolstered by ongoing structural reforms and policy efforts aimed at fostering innovation and sustainable development.
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