Increasing US tariffs could cut China growth sharply, IMF warns

China's economy already is slowing amid the trade conflict with the United States, but if Washington were to ramp up tariffs even further it could cut Chinese growth sharply, the IMF warned on Friday.

The International Monetary Fund already had trimmed its growth forecast for China to 6.2 per cent this year, assuming no new tariffs are imposed.

But US duties of 25 per cent on Chinese goods not yet facing tariffs would slow the economy in the following year, the IMF said in a report.

The annual review of China›s economy − known as the Article IV report − was completed before President Donald Trump announced plans to impose 10 per cent punitive tariffs on $300 billion in imports.

That new tranche means that all products from China will be subject to duties starting September 1 in the intensifying trade war.

The Washington-based global crisis lender once again called for a quick resolution to the trade conflict between the world’s economic superpowers, warning of “significant negative spillovers globally.” For China, the report said, “A further escalation of the trade tensions, for example the US raising tariffs to 25 per cent on remaining imports from (China), could reduce growth by around 0.8 percentage points over the following 12 months.” James Daniel, the IMF’s mission chief to China, said Friday the 10 per cent tariffs Trump announced could slow the nation’s growth by 0.3 points in the coming year.

While he declined to comment on the current status of the conflict, Daniel told reporters the fund›s recommendations to China in the event conditions deteriorate is to provide more fiscal stimulus and allow its currency to move freely to “help absorb the tariff shock.” The situation «requires some kind of response,” Daniel said on a conference call. But China›s currency “should remain flexible and market-determined,” which would mean “less intervention.» However, when Beijing allowed its currency to weaken Monday following the tariff announcement, Trump angrily accused China of manipulating its currency to gain a trade advantage over US companies.

China’s central bank then intervened to stabilize the exchange rate to prevent it from falling further.

Trump earlier Friday cast doubt on the chances for a trade deal, and signaled he might cancel talks planned for September.

Relations have soured further in the past week after Trump announced the new round of punitive tariffs, despite a truce agreed with President Xi Jinping in May, and Beijing responded by halting all purchases of US agricultural goods.

The US Treasury then declared China a currency manipulator, after the yuan dropped below seven to the dollar − a psychological threshold.

While Trump has crowed over the slowing Chinese economy, Daniel stressed that the gradual decline in growth is part of a process «to successfully switch from high-speed to high-quality growth.” The report projects growth will moderate to six per cent in 2020 and to 5.5 per cent by 2024.

But there is «an awful lot China can and should be doing» as part of that process, he said, including continuing reforms to open up more sectors of the economy, reducing impediments to trade and boosting consumption.

It is “very much in China›s interest” Daniel said.

The International Monetary Fund on Friday stood by its assessment that the value of China›s yuan was largely in line with economic fundamentals, but an IMF official said the fund was encouraging China to pursue a more flexible exchange rate with less intervention.

James Daniel said that an assessment of China›s economic policies found the yuan exchange rate in 2018 to be “not significantly over-valued or under-valued.”

The IMF’s views on the yuan are at odds with those of its largest shareholder, the United States, which this week declared China a «currency manipulator” after it allowed the yuan to slip below 7 to the dollar to 11-year lows.

US Treasury Secretary Steven Mnuchin is seeking to engage the IMF to help “correct” an unfair trade advantage from Beijing›s currency actions, but Daniel declined to say how the IMF was responding to the request.

“Our discussions with the US Treasury are ongoing on a range of issues,” Daniel told reporters on a conference call, echoing an earlier statement from an IMF spokesperson.

The IMF said in the report that a worsening of trade tensions with the United States could put China’s economic and financial stability at risk, making new fiscal stimulus measures from the government warranted.

The IMF said if the United States were to impose 25% tariffs on a remaining $300 billion list of Chinese imports, this would reduce China›s growth by around 0.8 percentage points over the following 12 months, driven by a sharp fall in demand and a tightening of financial conditions. Negative global spillovers could be significant, it added.

Agencies