The first day of US President Donald Trump’s second term came and went without the tariffs that he had earlier threatened to impose on his first day in office, including on Chinese imports. In response, the US dollar weakened and the renminbi strengthened, though not by that much—in part because market participants had not priced in aggressive initial duties, and in part because the threat remains that tariffs will eventually arrive.
The most important ramification of the initial reprieve may not be the market action, but the impact on China’s domestic policy. The worst-case scenario for trade hostilities—an early and aggressive deployment of US tariffs that risks locking both sides into an escalating conflict (see The Trade War Artillery Moves Into Place)—now looks less likely. It is possible that might lead policymakers to scale back stimulus, but the more probable scenario is that they will stick to their commitment to greater fiscal and monetary easing, even if tariffs prove less aggressive than many had feared. The result is higher upside risk for China’s economic growth and equity markets.
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