Trump’s $400B Tariff Threat Looms: Is China’s $1.4T Stimulus Enough to Safeguard Growth?

China’s $1.4 Trillion Stimulus: Can It Counter Trump’s Renewed Tariff Threats?

China has introduced a $1.4 trillion, five-year stimulus package to mitigate rising local government debt and bolster its economy, but looming U.S. tariffs from a re-elected Donald Trump could strain this effort. The key question: Will this package be enough, or will China need to respond with additional measures?

Breaking Down China’s Stimulus Package

On Friday, China’s Finance Minister Lan Fo’an announced that the central government would inject 6 trillion yuan ($840 billion) into local governments through 2026 to tackle mounting “hidden” debts, aiming to reduce local debt from 14.3 trillion yuan to 2.3 trillion yuan by 2028. This includes an annual issuance of 800 billion yuan in special bonds, totaling 4 trillion yuan over the next five years.

With this announcement, China aims to address vulnerabilities in local finances that worsened amid a severe real estate slump and pandemic-related expenses. This fiscal strategy follows monetary easing by the People’s Bank of China, which has already lowered key rates to encourage lending and support growth. However, the new stimulus primarily targets government finances, offering limited direct support to households or businesses.

Trump’s Tariff Threats: An Economic Headwind

Trump’s re-election and pledges to raise tariffs on Chinese goods, potentially ending China’s most-favored-nation trading status, introduce a new economic challenge for Beijing. Proposed tariffs could surpass 60%, well above levels from Trump’s first term, which would sharply reduce U.S. demand for Chinese exports. Given that China exports over $400 billion in goods to the U.S. each year, Trump’s tariffs pose a substantial risk to Chinese trade revenues and the broader economy.

Chinese leaders are signaling a more restrained approach compared to their response during the first Trump administration’s trade war. Analysts suggest China may attempt to exploit divisions between the U.S. and its allies while pursuing negotiations with Trump to soften the impact. Meanwhile, China has accelerated efforts to increase economic self-reliance, particularly in technology, and has expanded partnerships in the Global South to reduce dependency on Western markets.

Can China’s Stimulus Hold Up?

While the stimulus package aims to support growth and address long-standing debt issues, analysts caution it may fall short in the face of severe trade shocks. Nomura estimates that Beijing may need to authorize as much as 10 trillion yuan in new debt issuance by local governments over the coming years to meet their financial needs. This additional support could save local governments around 300 billion yuan annually in interest, but would raise China’s overall debt burden.

Li Mingjiang, a scholar at Singapore’s Rajaratnam School of International Studies, warns that trade friction with the U.S. would likely impact jobs and local government revenue, potentially necessitating even larger domestic stimulus measures than planned.

Market Outlook: A Likely Expansion in Fiscal Support

With Trump’s tariffs potentially weakening China’s exports and increasing pressure on local economies, the current stimulus package may not provide the full relief needed. Should U.S.-China trade tensions escalate, China’s government may be forced to broaden fiscal support to protect jobs and stabilize its financial system.

In summary, while the stimulus represents a significant commitment, the threat of U.S. tariffs may undercut its effectiveness. Unless China’s economic conditions improve or trade tensions ease, additional measures could be necessary to keep growth on track. For now, China’s policymakers are balancing between addressing immediate debt issues and preparing for a more challenging economic environment ahead.