Banks cut China growth forecasts over tariffs, deflation

Two investment banks cut their forecast about China’s economic growth by as many as 0.6 percentage points, citing the impact of US tariffs and deflationary pressures.

Morgan Stanley expects China's gross domestic product to expand 4.2 percent this year, 0.3 percentage points below the previous forecast, based on the estimates that a 0.9 percentage point economic drop on tariff shock will be partly offset by a 0.6 percentage point rise brought by additional stimuli.

It projects that Beijing would implement the 2 trillion yuan (HK$2.12 trillion) stimulus package announced by the National People's Congress in advance this quarter.

Measures could include lowering the deposit reserve ratio by 0.5 pps and cutting interest rates by 0.15 percent, as well as issuing construction bonds for local governments, boosting consumer product trade-in and offering maternity subsidy.

Beijing may announce an additional fiscal stimulus involving up to 1.5 trillion yuan in the second half, Morgan Stanley noted.

In terms of tariffs, Morgan Stanley thinks the US government may cancel the 20 percent fentanyl-related duty and decrease the reciprocal levies to 60 percent from 125 percent to mitigate the supply shock and reach a deal with China.

Meanwhile, UBS downgraded its full-year projection from 4 percent to 3.4 percent if the US continues to impose 145 percent tariffs and China rolls out more supportive measures.
UBS also estimates inflation in mainland China to stay below zero in 2025 and 2026.

STAFF REPORTER