TS Lombard downgraded its growth forecast for China in 2025 by 20 basis points to 4.5% after US President Donald Trump's 54% tariffs on Chinese goods, of which 34% was "reciprocal" and 20% tied to fentanyl.
The consultancy firm also expected an additional round of fiscal stimulus in the second half of 0.5% to 1% of GDP, according to a Thursday news release.
Government bond issuance and infrastructure support will likely accelerate, said Rory Green, chief China economist for TS Lombard. Domestic consumption and investment, not exports, will now have to shoulder growth-marking a compositional shift for the Chinese economy.
To facilitate government bond issuance, TS Lombard expects the People's Bank of China to step up liquidity injections and cut reserve requirement ratio by 25 basis points in the second quarter. The central bank is also expected to hold policy rates steady while managing mild yuan depreciation.
Beijing appears to keep serious retaliation "on hold for now" in anticipation of negotiations, particularly over the fentanyl-related 20% tariff-which accounts for an about 0.6% hit on China's GDP.
Geopolitically, the tariffs are seen as a "clear win" for China, accelerating US-Asia decoupling and shifting influence in the region, Green said. "US influence in Asia will fall, with trust already gone and economic ties withering. China is the main beneficiary," he added.
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