With the US President Donald Trump threatening to impose additional 10 per cent tariffs on Chinese imports on March 4, CareEdge Global said that the credit profile of China [rated ‘CareEdge A (Unsolicited)’] should be able to bear the near-term impact of the additional tariff. The US tariff comes at a time when China’s economy is already grappling with domestic challenges, such as a slowdown in the property sector and weak consumption. As a result, there is an increasing focus on the measures China will take next to support its economy, especially as it seeks to rein in its elevated off-budget debt.
Earlier last week, China’s Ministry of Commerce had said that it “firmly opposes” Trump’s latest threat to ramp up tariffs on Chinese goods and vowed retaliation, if necessary. “If the US insists on its own way, China will take all necessary countermeasures to defend its legitimate rights and interests,” a Ministry of Commerce spokesperson said in a statement, translated by CNBC. “We urge the US side to not repeat its own mistakes, and to return as soon as possible to the right track of properly resolving conflicts through dialogue on equal footing,” it added.
First US-China trade war: What worked then? Will it work now?
China’s export dependence on the US has reduced since the first trade war. China’s exports to the US now account for 2.8 per cent of its GDP (2024), down from 3.5 per cent before the start of the first trade war (2017). During the first US-China trade war, the trade-weighted tariff rate on Chinese goods increased to around 21 per cent in 2019 from around 3 per cent in 2018. These tariffs were mainly imposed by the US due to its large trade imbalances with China. Later in 2020, the US and China signed a Phase One trade deal aimed at easing tensions. According to China’s Customs data, China’s trade surplus with the US has also moderated in recent years, falling to $360 billion in 2024 from a peak of $404 billion in 2022. However, China’s overall trade surplus has grown, reaching an all-time high of nearly $1 trillion in 2024.
CareEdge Global said that China is expected to use similar strategies this time to navigate the tariffs. “The yuan has depreciated by around 3.4 per cent between October 2024 and February 2025 (as of February 26), driven by concerns over a new trade war and widening interest rate differentials with the US. However, the People’s Bank of China (PBOC) has taken measures to prevent a sharp depreciation, such as setting stronger USD/CNY daily fixings. It has also suspended treasury bond purchases to limit the fall in yields and has raised offshore borrowing limits to allow more foreign exchange inflows. Additionally, the PBOC has issued warnings against yuan speculation,” the CareEdge report maintained.
Per the brokerage firm, USD/CNY is expected to trade with a depreciation bias in the near term as the US Fed keeps interest rates higher for longer and China keeps monetary policy loose to support its economy. “While the yuan may weaken further as a countermeasure against President Trump’s aggressive tariff actions, the pace of depreciation will likely be slow to contain capital outflows. The yuan may also not depreciate too much, as this could provoke tariff threats from other countries at a time when trade protectionism is rising globally,” the report stated.
China could take further retaliatory actions if the US increases tariffs. CareEdge informed that over the past years, Chinese companies have set up factories abroad, which could allow them to shift some of their US-bound production overseas to avoid tariffs. It also maintained that the government may too provide some stimulus to mitigate the impact of tariffs.
Will there be a substantial impact or not?
CareEdge said, “While the additional tariff could reduce China’s exports to the US, we expect China’s current account balance to remain in surplus due to its critical role in global supply chains and advancement up the value chain, though the foreign direct investment into China could get affected if the trade tensions negatively impact investor sentiment.” However, it further maintained that any such challenges to the credit profile are likely to be offset by China’s strong external position, reflected by its low external debt (around 14 per cent of GDP in 2023) and substantial foreign exchange reserves (around $3.2 trillion as of January 2025).
China’s real GDP growth was already expected to slow in 2025 due to ongoing issues in the property sector, weak consumption and a broader structural slowdown. With the additional tariff, CareEdge said, growth could slow slightly further due to reduced exports and weaker consumption and investment sentiment. “Our analysis indicates that the additional tariff could reduce China’s real GDP growth by around 0.25pp in 2025. As a result, disinflationary pressures may persist in 2025, especially if domestic demand also remains weak. However, the actual impact on growth and inflation will depend on several factors, such as the price elasticity of demand for Chinese goods and the extent of support the government provides to mitigate the impact of tariffs,” the report said.
From a fiscal perspective, China’s fiscal deficit is expected to widen by 1-1.5 per cent of GDP in 2025, resulting from a possible fiscal stimulus in response to China’s domestic and external challenges.
Still, CareEdge said, “uncertainty remains high, and it will be important to track how tariff-related developments unfold”. Going forward, the upcoming USTR report is expected to play a key role in shaping the US-China trade relations. The National People’s Congress meeting in March will also be crucial, as more stimulus measures are expected to address China’s challenges. It is also to be seen whether the US and China will have any negotiations that will result in an agreement offering China some reprieve similar to the one given to Mexico and Canada.