Chief economist update: The (trade) war is back on

"If it weren't for the last minute, nothing would get done." - Rita Mae Brown.

This famous quote might be true in general, but it certainly didn't apply to the 11th hour, last minute trade negotiations between the United States and China on the May 9 that resulted in a no deal.

As a consequence, as at 12:01am Friday on the May 10 (New York time), US tariffs on about US$200 billion worth Chinese goods increased to 25% from 10% with Trump already readying the paperwork to slap a 25% tariff on all remaining imports from China worth around US$325 billion. As expected, China promised to take "necessary counter measures".

The trade war is back on and could kill off the green shoots that have recently been sprouting in the Chinese economy.

Both the National Bureau of Statistics' (official) and the Caixin PMI surveys show that the non-manufacturing sector (services) remains in expansion while manufacturing activity has rebounded into expansion territory in March and April this year after contracting in December, January and February.

Not only that, latest updates show other Chinese domestic macro indicators have improved.

Retail sales growth accelerated to 8.7% in the year to March from 8.2% in the previous month - above market expectations for a 8.4% gain and the fastest rate since September 2018.

Annual growth in industrial production sped up to 8.5% in March - the biggest increase since July 2014 - versus 5.3% in February, beating expectations for a 5.9% increase.

Fixed asset investment growth quickened to 6.3% in the year to March from 6.1% in the previous month - a sharp improvement from the record low (based on Factset data going back to 1998) of 5.3% recorded in August last year.

For sure, these positive developments resulted from economic stimuli delivered by the Chinese government and the People's Bank of China's (PBOC) as well as hopes (at the time) that a trade deal with the US would be reached.

The recent breakdown in trade negotiations - and the potential for an escalation - necessitates continued policy support from Chinese authorities.

In response to the negotiation breakdown, the PBOC stressed it has sufficient tools to support and stabilise the economy.

According to news and intelligence provider MNI, Sun Guofeng - head of the PBOC monetary policy department - declared: "The central bank will make good use of structural tools, including targeted medium-term lending facility and rediscounting, to guide financial institutions to support the economy, particularly private small businesses."

Read more: Bank of ChinaFactset
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