China: fiscal stimulus will avoid severe global repercussions
In Short
- The prolonged slowdown and deflationary environment in the Chinese economy has raised concerns about the potentially significant global impact. The risk of punitive US tariffs in case of a Trump victory may are adding to the risks.
- Stronger and coordinated policy support are on the way, but the scars of the crisis still have a structurally dampening effect. A focus on downside risks is therefore useful. Similarly, the promise of significant fiscal support has led to high expectations. A possible Trump win is another clear downside.
- We simulate the impact of a deep domestic downturn, with Chinese GDP lower by 1.5% than the baseline next year, which the government tries to counter by cutting export prices and another one in which , by raising public investment significantly, the government boost GDP by 1%. We measure the impact on GDP and inflation for the largest economies and EMs.
- The reaction of EM assets will be heterogeneous in both scenarios. In a negative scenario, EM FX would be the most vulnerable, with LatAm commodity exporters and open economies in Asia on a back foot. In a positive scenario, local and external debt should benefit equally, while EM FX in the most open economies would outperform.
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