China braces for critical week amid US election and anticipated stimulus plans

As China prepares for a pivotal week, the outcome of the US presidential election could significantly shape the scale of its upcoming economic stimulus according to a detailed report by CNBC.

Analysts predict that the details of Beijing's fiscal support will emerge on Friday, coinciding with the conclusion of a five-day meeting of the National People’s Congress, China’s legislative body. Last year’s session resulted in an unprecedented increase in the fiscal deficit, setting the stage for further economic interventions this year, the CNBC report detailed further.

The timing of this meeting is crucial, as it follows the US elections where voters will choose between Republican nominee Donald Trump and Democratic contender Kamala Harris. Polls will close on Tuesday, and the implications of the election results could be profound for China’s economic strategy

Further, according to Ting Lu, chief economist at Nomura, if Trump wins, the fiscal stimulus package could be 10-20 per cent larger compared to a potential Harris victory. He notes, however, that many of China’s economic challenges are rooted domestically, with only a partial influence from US election outcomes.

Trump's threat of tariffs

Trump's threats to impose steep tariffs on Chinese imports, potentially raising them by up to 200 per cent could severely impact China’s export-driven economy, which is already grappling with a sluggish real estate market and weak consumer demand. Conversely, Harris has not indicated a significant shift from the Biden administration's approach, which has included restricting Chinese access to advanced technologies. Such trade tensions would necessitate a stronger reliance on domestic consumption to spur economic growth.

Zhu Bin, chief economist at Nanhua Futures, asserts that a Trump victory would likely lead to larger domestic stimulus measures in China. He also anticipates downward pressure on the yuan if Trump wins, reflecting increased economic uncertainty, the CNBC report detailed further. Political analysts are divided on whether relations with the US would improve under Trump or Harris, with some arguing that a Harris presidency might allow for more predictable policy expectations from China’s perspective.

Despite these dynamics, experts caution against large-scale stimulus due to the ongoing US-China rivalry. Liqian Ren from WisdomTree suggests that while the scale of stimulus may be influenced by market reactions post-election, the Chinese government remains focused on technological advancement, which limits its willingness to launch aggressive economic support measures.

Market volatility in China, which is more pronounced than in the US, could compel the government to act more decisively. Recent fluctuations in the Chinese stock market have tempered gains that were seen in late September, despite President Xi Jinping’s calls for enhanced fiscal and monetary support.

With anticipation building, analysts project that China may consider issuing over 10 trillion yuan in debt over the next few years. While exact numbers remain uncertain, some believe the stimulus could exceed 4 trillion yuan, a figure that reflects the government’s response to past economic crises. Currently, China has set a deficit target of 3 per cent for the year, which could potentially rise beyond 4 per cent.

Local governments, however, face challenges that could hinder stimulus effectiveness, such as stringent tax collection practices that may stifle business activity. This suggests that any stimulus may primarily benefit financial institutions rather than directly supporting consumers.

Analysts indicate that true consumption recovery may rely heavily on support for the real estate sector in the near term, with a more robust consumption stimulus becoming viable only under severe tariff pressures.