(April 7): China warned against panic in the face of President Donald Trump’s tariff hikes, saying it has plenty of policy room to defend the economy, but without ruling out negotiations with the US.

“The sky won’t fall, even though the US abuse of tariffs will cause some impact on us,” the official People’s Daily said in a front-page editorial on Monday. “We must turn pressure into motivation.”

China is honing a domestic message of resilience after retaliating against Trump’s sweeping tariff announcements last week by imposing levies on US goods. With no compromise in sight, the unsigned article in the Communist Party’s mouthpiece publication laid out plans to counter the economic fallout by supporting domestic demand with stimulus measures, such as lower interest rates.

The dimming prospect of a deal between the world’s two biggest economies has prompted a sell-off in financial markets, and raised speculation among investors that China may resort to aggressively devaluing the yuan against the dollar.

Global banks like Morgan Stanley have voiced worries over the damage that punishing US tariffs and a further escalation in trade tensions could inflict on the Chinese economy. Just weeks earlier, Beijing announced an ambitious growth target of around 5% for this year.

The Hang Sang China Enterprises Index, which tracks Chinese shares listed in Hong Kong, plunged nearly 14% on Monday, the worst day since the Asian financial crisis. The yield on China’s 10-year government bonds dropped eight basis points to 1.63%.

The onshore yuan weakened almost 0.5%, even after the People’s Bank of China set the Chinese currency’s daily reference rate at a level that was much stronger than expected.

“In contrast to our prior expectation that China’s response may be measured, preserving space for negotiation, China has taken a more confrontational stance,” Oversea-Chinese Banking Corp (OCBC) economists led by Tommy Xie said in a note on Monday. 

Under plans outlined in the People’s Daily, which is frequently used to express official policy views, China appears more committed to make bolstering domestic demand its “long-term strategy”, and to turn consumption into a “major driver and ballast” for economic growth.

The government will look to boost consumer spending with “extraordinary strength”, cut rates and pump more long-term liquidity into the banking system whenever needed. It also has room to raise the fiscal deficit and sell more bonds to expand public spending, according to the article.

The commentary followed the tit-for-tat countermeasures announced last Friday by President Xi Jinping’s government in response to Trump’s so-called reciprocal tariffs on China, including a 34% tariff on all imports from the US, and restrictions on some rare earth exports. 

Policymakers gathered over the weekend to discuss stabilising the economy and the markets, and considered moving forward some measures that were planned even before Trump’s tariffs, according to people familiar with the matter. 

On Sunday, China’s Commerce Ministry also met with 20 American firms including Tesla Inc and GE HealthCare Technologies Inc to assure them of Beijing’s support for US companies. Days earlier, China announced it was probing the local subsidiary of US-based DuPont for suspected antitrust violations.

Vice Minister Ling Ji said China’s retaliation is meant to steer Washington back to the path of multilateralism, and urged US companies to be the voice of the reason and take practical actions to maintain supply-chain stability.

A potential window for major policy adjustments in China might open in late April, when the Communist Party’s decision-making body Politburo will convene to review the economy. Chinese officials will also have the chance of holding their first in-person talks with the Trump team when they travel to Washington later this month for the annual International Monetary Fund and World Bank meetings.  

Key economic indicators for the first quarter are due before the Politburo conclave. Most analysts anticipate growth likely held up, thanks to front-loading of exports and recovering consumption, while investment improved because of previous support introduced by the government.

“Any escalatory moves beyond the already prohibitive tariffs perhaps carry more symbolic meanings than real impact,” Citigroup Inc economists including Xiangrong Yu wrote in a note. “Domestic stimulus to offset the tariff impact is of higher certainty, and we could see the earliest signal from the April Politburo meeting.”

The official Xinhua News Agency said on Saturday that Beijing will continue to take “resolute measures” to safeguard its sovereignty, security and other interests. US tariffs announced last week will raise levies on nearly all Chinese products to at least 54%, potentially crippling exports to the US.

The article in the People’s Daily suggested a range of other possible measures. 

“Concrete and effective policy steps will be taken to firmly stabilise the capital market and restore market confidence, with relevant contingency actions to be rolled out in succession,” it said.

The stock sell-off on Monday prompted Central Huijin Investment Ltd to post a statement in the afternoon saying it boosted its holdings in exchange-traded funds and plans to keep buying to maintain market stability. Huijin is a unit of China’s sovereign wealth fund that has at times purchased equity in an attempt to put a floor under stock prices.

The benchmark CSI 300 Index of onshore shares pared losses following the announcement, but still closed down 7.1%, its deepest plunge in half a year.

Besides seeking to assure financial investors, Beijing also hinted at help for the real economy. Governments at all levels will assist industries and businesses severely hurt by the China-US stand-off, according to the People’s Daily article.

Authorities will support companies in adjusting their business strategies, and guide them to expand into domestic and non-American markets, while striving to maintain trade with the US as much as possible.

The commentary acknowledged the tariff impact, saying that the new 34% levy, together with the previously imposed US tariffs, “will significantly suppress bilateral trade”. China’s exports are set to face a blowback in the short term, creating more downward pressure on the economy, it said.

The Chinese-language article indicated, however, that the US may be hurt more by the trade war because it “relies heavily” on China for a wide range of consumer goods as well as intermediate products. 

Shipments to the US have declined and account for less than 15% of China’s total exports, from more than 19% in 2018, according to the People’s Daily. It said “there’s huge potential for the economic and trade cooperation with emerging markets”.

It also made clear the trade showdown didn’t come as a surprise, and Chinese leadership had already mapped out plans for how to respond. “China has been engaged in a trade war with the US for eight years, and has accumulated extensive experience in the fighting”, it added. 

Invoking Xi’s previous comparison of the Chinese economy with a “vast sea”, it vowed to “resist the invasion of trade cold waves, and eventually let the world see the composure and determination of the sea that embraces all rivers”. 

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