Trump could dictate China's macroeconomic policy decisions: Liu Yuanchun

The Shanghai economics professor also believes a US recession is inevitable.

Towards the end of last year, China signalled the launch of large-scale macroeconomic stimulus, with official reference to “even more active fiscal policy” and “moderately loose monetary policy” at its Central Economic Work Conference in December.

The Two Sessions congressional event in March gave affirmation to these preliminary signals, with Beijing unveiling plans for an unprecedented 4% deficit ratio in 2025.

Domestic analysts further expect the broad deficit ratio to approach double digits this year, when China’s issuance of special treasuries and special purpose local bonds are also included.

The chief reasons cited for launching such a sizable stimulus plan at this juncture include weak domestic demand - as Chinese households continue to recover from the balance sheet impacts of the property slump, as well as the headwinds of an aggressively protectionist Trump administration.

Much discussion has focused in particular on the adverse impact of Trump’s shock tariff measures on China’s economy.

Optimists, as well as deficit hawks, in China argue that Washington’s tariffs are unlikely to have a calamitous impact on the economy, given that the US share of Chinese exports has fallen, with other nations now picking up the slack.

A leading Chinese economist argues, however, that the US still wields far greater sway over Beijing’s macroeconomic policy decisions than generally realised, given it’s not just tariffs that can have an impact from the other side of the Pacific.

Liu Yuanchun (刘元春), chancellor and deputy party-secretary of Shanghai University of Finance and Economics, argues that US economic animosity could also expand to include “exchange rate policy, financial policy, digital currency and virtual assets.”

“We can’t just focus on tariffs and ignore other areas,” Liu wrote in a recent opinion piece (刘元春：今年面临超常规不确定性，应预留超常规相机决策空间).

“Measures in relation to monetary and financial issues [from the US] could be even more intense.”

Liu argues that the impact of Washington’s decisions on the Chinese economy has already hit a mini-crescendo, given the uncertainty created by Trump’s foreign policy decisions.

He points in particular to uncertainty in relation to the Ukraine-Russia conflict and the conflict in Gaza, as well as a “trade war” between the US and the European Union caused by the Trump administration’s tariffs threats.

For this reason, the future course of macroeconomic policy that China chooses to chart will depend heavily on the policy decisions of the US.

“If we cannot accurately grasp the macroeconomic trends and path of policy adjustments in the US, then it’s very difficult to grasp the pace, path and intensity of fiscal and monetary policy adjustments in our own country.

“The reason is that in the current complex environment, the scientific decisiveness of Chinese policy must be based upon the way that the US unveils its policies, and clear analysis of the backlash effects.”

“A US recession is inevitable”

Liu believes the importance of understanding the impact of Washington’s policy decisions on China is especially acute at present, on the grounds that recession in the US is a near-term cyclical inevitability.

“The effects of the US economic cycle are already causing it to transition from a high-point to a downturn, and in the next several years a recessionary trend is certain,” he writes.

He further believes that prevailing financial and political conditions could lead to the “accelerated emergence” of a US recession, pointing in particular to the potential bursting of a bubble in stateside AI stocks, as well as Trump’s trade war and the triggering of retaliatory tariffs from other major economies.

“Tariffs could potentially lead to a prisoner’s dilemma between the US and its major trading partners, and the complete explosion of a trade war,” Liu writes.

Liu does not believe that the US has the ability to compensate for the shortfall in product supply created by tariffs, given the time it will take to ramp up domestic manufacturing capacity.

The outcome of all this could be a stagflationary episode that will prompt the US Fed to cut rates in the absence of effective fiscal policy.

“The backlash effects will trigger a strong reaction at all levels of the US,” Liu writes.

“Even if tariffs are greatly increased and import volumes fall, domestic production will be unable to keep up effectively, leading to ongoing rises in prices.

“After the third or fourth quarter, retaliatory tariffs from trading partners could further hit US domestic production…this is a phenomenon that occurred in 1979 and 1971 and is well attested.”

Specific impacts

Liu highlights several key areas where Washington’s policy responses to recessionary impacts could affect China’s implementation of its 2025 stimulus plans.

He firstly notes that if the Fed cuts rates in April or May, then this will have an adverse and limiting effect on the Chinese central bank’s ability to implement reductions to its reserve ratio, or make cuts to interest rates as originally planned.

Secondly, Liu points to a weaker US dollar also potentially affecting Chinese monetary policy, by triggering a stoush with Washington over renminbi exchange rates.

Thirdly, Liu believes there could be a sell-off in US treasuries, as a result of global concerns over a US recession or Washington’s mounting deficit levels, as well as Trump’s Mar-a-Lago Accord and plans mooted to devalue the dollar.

For these specific reasons, Liu believes it imperative to scrutinise US policy maneuvers when assessing China’s own macroeconomic decisions throughout the course of the year.

“This is especially the case given the acceleration of once-in-century changes, the complex external environment, and potentially greater shocks for China’s trade and science and technology,” Liu writes.