Nomura analysts say the United States and China are “entangled into an unprecedented and expensive chicken game”.
“It seems neither side is willing to back down,” said Japanese Investment Bank in an analysis of the latest developments in the trade war sparked by tariffs imposed by U.S. President Donald Trump last week.
Financial markets in both economies have suffered a severe blow, but “the worst may not have come yet.”
See also: Asian markets are on the rise as China rejects US tariffs “raised”
They believe that the People's Bank of China will oversee large-scale state funding efforts through asset management groups and local banks' “national teams” to enhance the domestic stock market.
“We expect China's stable funding … backed by PBOC will significantly intervene in the stock market in the coming weeks,” they said.
“Beijing is also likely to vow to speed up and increase fiscal spending to enhance demand, especially consumer demand.
“In addition to funding national teams, PBOC can also implement the highly anticipated RRR [the reserve requirement ratio imposed on local banks] Cuts and policy rates are earlier than planned. ”
But they believe that central banks will not depreciate the RMB/yuan or allow large currencies to depreciate to maintain stability in the domestic financial and real estate markets, which may be because the United States has expressed concerns about this practice.
They said it is impossible to estimate the impact of the trade war on China's economy at this time because it is “very smooth”.
But they maintain their 2025 GDP growth forecast at 4.5% – below Beijing's “about 5.0%” target.
Bilateral tensions are getting worse
The reason for this is because they “have considered it very much Severely deteriorated Tensions between the United States and China and policy stimulus from Beijing to deal with the tariff impact.
However, as U.S. tariffs could weaken China's exports and exert largely disinfection pressures, they lowered their forecasts for export growth and CPI inflation to -2.0% and 0.0% in 2025.
In 2018-19, China was able to export through third countries such as Mexico and ASEAN countries, but the expansion of U.S. tariffs “effectively closed down diversion channels” and limited China’s ability to avoid U.S. tariffs through intermediaries.
But they expect Beijing to step in to step in spending more to make up for the decline in export growth and to make up for measures to increase domestic demand.
“Beijing may also take support measures to clear up the chaos in the real estate sector. Because it is difficult to assess economic losses, and perhaps Beijing does not want to be perceived by Beijingers as it is in chaos, Beijing may remain in the treatment model and may spend time increasing budget deficits and quotas for new bond financing,” they said.
China could even demonstrate its ability to enclose the oceans and sky around the Taiwan Strait, as they did before the extra 10% tariffs of the U.S. came into effect, which sparked a fierce two-day military exercise earlier this month.
Policymakers in Beijing may also need to consider a substantial increase in basic pension payments to low-income families, or increase health insurance subsidies to enhance consumption and reduce inequality, given the highly inequality social welfare system. ”
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