SUMMARY
- If Trump wins the US election, Beijing will face a difficult tradeoff between increasing stimulus to reinforce domestic growth/confidence and preserving policy space for what may be a bruising four years of US-China tensions
- The National People’s Congress Standing Committee will front-load fiscal stimulus on Nov. 8 if Trump wins, but Beijing’s full economic response to Trump would come only come at the March 2025 annual National People’s Congress
- Beijing will tolerate depreciation of the CNY in the weeks after a Trump victory but aim to keep the pace moderate
- If Harris wins the election, Beijing will be more likely to outline only incremental stimulus measures in weeks ahead, with most economic policies continuing along the status quo
As US election results come in over the next two days, the note below outlines expectations for how China’s economic policymakers will respond to a Trump or Harris victory and the implications for China assets in the weeks ahead. This follows a note on Friday (link HERE) that laid out China’s likely fiscal stimulus plans in 2025 in each election scenario.
IF TRUMP WINS…
First, the big picture. China’s leadership knows that it will be in for a long, volatile, and potentially punishing four years dealing with Trump. The most serious economic threat is of course tariffs. There is a wide range of forecasts for how China’s GDP would be impacted if – and it remains a very big “if” – Trump fully implements his threat to raise tariffs on imports from China by 60%. Using a trade model, the Peterson Institute for International Economics projects a hit to annual GDP of slightly less than 1% in 2025-2027, with the CNY’s effective exchange rate depreciating by 10% to offset some of the impact on tariffs. When factoring in ripple effects of slower export growth on domestic consumption and investment, UBS’ Wang Tao projects an overall hit to GDP growth of 250 basis points in the 12 months after tariffs are imposed – on the high end of expectations but not extreme.
Beijing will use the months after the election – and especially after Trump’s inauguration in January – to pursue negotiations that delay and ideally reduce/avert tariffs. But Beijing will not accept a trade deal at any cost. Even with a weak economy giving Xi a tougher hand to play than in Trump’s first term, China’s leader will be adamant against conditions that compromise his core geopolitical or economic goals, such as demands to radically dismantle China’s industrial policy apparatus. Beijing will thus be prepared to fight a war of attrition, requiring a difficult balance between increasing stimulus to reinforce domestic demand and confidence, while also preserving policy space for the longer term. Beijing’s recent policy pivot already shows this balance: the authorities have been eager to revive equity markets and to lower economic risks from property and local government debt, but at the same have avoided major stimulus (at least thus far).
With this backdrop, we expect Beijing’s policy response in coming weeks to be as follows:
Stimulus: Beijing’s stimulus response to Trump will evolve in stages:
- On November 8, the National People’s Congress Standing Committee (NPCSC) will announce plans for debt/deficit expansion in the near-term and potentially outline a multi-year package. As laid out in our Friday note on fiscal stimulus (link again HERE), we expect an announcement of 1-2 trillion in issuance of central government special bonds for stimulus spending in 2025. This will be an initial effort to boost confidence but may represent more a front-loading of 2025 stimulus than an increase in overall size.
- At the Central Economic Work Conference in early/mid-December, Beijing will outline its economic priorities for the year ahead, providing an early sense of the broader suite of policies (including monetary policy and property measures) to support growth.
- Beijing’s full economic response to Trump would come at the March 2025 annual NPC meeting, when it formalizes key policies and targets for the year. By this time Beijing will have had much more time to engage Trump and his cabinet and assess the outlook.
Exchange rate management: Beijing’s balancing act for FX policy is between allowing the CNY to depreciate in response to the likelihood of tariffs on the one hand, and on the other not allowing expectations of weakness to become so entrenched that the CNY overshoots, with rapid depreciation leading to capital outflows (and a sell-off in Chinese equities) in a destabilizing vicious circle. In practice, we expect a phased approach:
- In the days immediately following the election, PBOC will use intervention and other tools to maintain stability against the USD to calm nerves.
- In the weeks that follow (mid-November to January), Beijing will tolerate depreciation but use its toolkit to aim for a moderate pace.
- As Trump takes office and his trade policies become clearer, Beijing will need to recalibrate the balance between flexibility and stability. If Trump moves head with 60% tariffs in 2025, significant currency depreciation (10% or even a bit more) is very likely but PBOC will aim for a managed pace that avoids overshooting. While close to 1% daily movement in CNY fixing has become more common in recent years, a one-off devaluation of the CNY – such as the ~2% clip in August 2015 – is quite unlikely, as it risks spooking markets and exacerbating financial stability concerns.
Equity markets: Trump’s election will be a challenge for Beijing’s recent efforts to revive domestic equity markets. While Beijing will likely use the “national team” to smooth out volatility (as with the exchange rate), the authorities will avoid signaling consistent support at a certain level for the markets. The response instead will be to roll out additional measures to try to enhance the appeal of domestic markets, potentially including an expansion in the size or scope of recently introduced PBOC lending facilities for equity investors.
Trade and structural policies: On the trade side, Trump’s election would give the EU and China more reason to prevent the dispute over China’s EV exports from escalating further into a full-blown trade war. In advance of the March 2025 NPC meeting, Beijing may signal additional urgency behind structural reforms to boost consumption, such as urbanization policies.
IF HARRIS WINS…
Beijing’s initial response to a Harris victory is easier to outline, given that she is likely – especially at the start of her term – to continue the approach of the Biden administration. This means that while Beijing will expect US-China tensions to stay high, particularly when it comes to US technology restrictions, the risk of tariff escalation or other potentially destabilizing measures from Washington is low. The overall economic strategy will thus be largely status quo.
When it comes to macro policies, a Harris victory will give Beijing more comfort that it can pursue only incremental stimulus measures over the next year. Thus, we would expect the Nov. 8 NPCSC meeting to outline only CNY 1 trillion in central government special bonds, representing the first installment of an expected CNY 2 trillion for 2025 as a whole (see our fiscal note for more). The policy pivot, including support for equity markets, will aim for stabilizing growth and confidence rather than trying to aggressively promote a strong economic rebound.
Trade and investment policies will continue to focus on strengthening ties with the Global South amid frosty relationships with the G7 countries, angry over Beijing’s support for Russia. Structural policies, as outlined at the Third Plenum in July, will continue to focus on innovation and industrial policy rather than deepening reforms.
