Trump’s Tariff Increase Forces China Closer to Critical Economic Scenario
Former President Trump has increased tariffs on Chinese imports to 54%, intensifying trade tensions and pushing relations towards a negative scenario. Analysts warn of potential retaliation from China and speculate on the PBOC easing policies as conditions deteriorate, impacting the yuan’s stability.
Recent measures by former U.S. President Donald Trump have increased tariffs on Chinese imports to an unprecedented 54%. This reflects a new 34% reciprocal tariff added to an existing 20% levy, pushing the trade relations towards the “worst case scenario” anticipated during his campaign, as indicated by analysts at ING. Further increases in tariffs, particularly on electric vehicles, are also anticipated.
As a result of this significant escalation, ING cautions that the potential for retaliatory actions from China has markedly heightened. This development occurs amid China’s struggles with deflation and a slowdown in economic growth, which has led to expectations that the People’s Bank of China (PBOC) may soon implement its first policy easing of the year.
ING projects that the PBOC will likely decrease interest rates by 30 basis points and lower the reserve requirement ratio (RRR) by 100 basis points in 2025, providing possibilities for further adjustments if necessary. The central bank has previously indicated its willingness to ease policy when appropriate.
On the currency front, ING anticipates that the new tariff shock will exert additional downward pressure on the yuan (CNY) in the short term. This situation arises as markets evaluate the economic impact of the tariffs alongside expectations of monetary easing. However, ING asserts that the PBOC is unlikely to intentionally devalue the currency in response to the tariffs, instead focusing on maintaining a stable exchange rate.
The central bank’s strategy suggests that it aims to keep the USDCNY exchange rate displaying low volatility, with a projected trading band of 7.00 to 7.40 for the remainder of 2023.
In summary, the increased tariffs imposed by Donald Trump have escalated tensions in U.S.-China trade relations, moving towards a potentially disastrous scenario. Analysts predict that this development could provoke significant retaliatory measures from China and prompt the PBOC to implement policy easing measures. Furthermore, while the yuan may face short-term pressure, the PBOC is likely to focus on maintaining currency stability moving forward.
Original Source: www.tradingview.com
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