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China is booming, but next comes Trump's tariff verdict

Kelly Olsen

Beijing is surely watching closely as a deadline for proposed American tariffs on China draws near, but any concern has been blunted by just how well the Chinese economy has been doing in recent months.

The U.S. is due by Friday to release the final list of products subject to the 25 percent levies the White House announced last month on $50 billion in imports. U.S. President Donald Trump is trying to bring down a $375 billion annual trade deficit with China, and he's using the threat of a trade war to force concessions from Beijing.

For its part, the Chinese leadership would surely prefer to avoid such a conflict and has attempted to appease Washington with offers to increase purchases of American products. But if push comes to shove, the fundamental strength of China's economy could help alleviate the damage of any outright trade confrontation, experts said.

"All measures broadly indicate that China still is actually doing quite well economically right now," said Shenzhen-based economist Christopher Balding, adding that data also suggest consumer confidence is high.

"So I don't believe there would be a lot of either popular or political support for any type of easy backdown to Trump," Balding told CNBC. "I think there would be relatively wide support for pushing back to some degree."


China said its economy grew 6.8 percent in the three months to the end of March, beating economist expectations, and maintained the same rate of expansion for the third straight quarter. Importantly, many economists question the veracity of that official growth data, but other metrics, too, have shown strength.

The latest upbeat view on China's economy comes from Morgan Stanley, which said the prospect of rising corporate bond defaults in the country is unlikely to cause a broader crisis — a fear that has hovered over the world's second-largest economy in recent years.

"Systemic financial risk is unlikely, considering the small size relative to the overall financial system, stable interbank interest rates, and more resilient economic fundamentals than in previous stretched periods in 2014-16," economists from the investment bank wrote in a report dated Sunday.

China suffered its first bond default in March 2014 and worries over the country's financial health have simmered, with an uptick in defaults this year spurring concern.


'Extremely unpredictable' White House

But Morgan Stanley said defaults this time are a "desired result" of increased efforts by regulators to deleverage the economy over the past 18 months.

"We believe orderly bond defaults could foster healthier development of the onshore bond market, increasing its attractiveness to foreign investors and facilitating China's capital account liberalization over the longer run."

Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong, called China's growth "remarkably stable" over the past few years and said "systemic risks" such as those affecting the financial system are firmly under control.

"This White House is extremely unpredictable and can and does change its mind very quickly," Hofer cautioned, though he added he doubts the U.S. will go ahead with the tariffs on Friday after Trump's summit with North Korea avoided a breakdown.

But if the U.S. does, China would likely try to lessen any impact by stimulating its economy.

Such a move, he said, would go against the trend of recent years as authorities have sought to slow growth and create an economy grounded in consumer spending and services rather than big-ticket investment.

"You will get propping up of the property market, you will get ramping up of fixed asset investment and so on," he said. "I think it's something that they will feel that they need to do to defend growth in the short term."

Balding said the immediate impact of tariffs is unlikely to be significant, but their effect would be more serious if they remained into next year and China continued its campaign to restrain credit.

That, he said, "would be a very, very different picture where, all of a sudden, you're really starting to impose some very real pain."