As the US general election ended with a resounding victory for GOP and Trump, the market became increasingly worried about the US raising tariffs on Chinese exports. At the same time, due to concerns about a significant decline in China's overall exports next year, the RMB exchange rate has also weakened significantly, and the domestic stock market's expectations for the Chinese government to introduce a new round of domestic stimulus policies to hedge against the risk of weakened external demand continue to rise.

However, we believe that there is no need to worry too much about the impact of the Trump 2.0 government's tariff increase on China's exports. Although in the short term, raising tariffs may have an impact on some Chinese direct exports to the US, we believe that this impact will be  short-term. Since 2018, China's dependence on the US market for exports has been decreasing, and the proportion of direct exports to the US in China's exports has decreased from 20% to around 15% (Figure 1).

Over the past few years, the regions where China's exports have grown rapidly have mainly been developing economies such as ASEAN, Russia, Africa, and Latin America. The Chinese government will continue to increase China's export share to these developing economies through diplomatic and trade negotiations, foreign aid, and “One Belt and  Road Policy”.

Source: Bloomberg, CEIC, Wind

Secondly, from a perspective of global trade, as long as the overall trade deficit of the US remains unchanged, it means that a decrease in China's trade surplus with the U.S. will not impact the overall size of China's trade surplus. . In fact, we can see that this is the case during the 8 years from Trump 1.0 to today (Figure 2). Within the 8 years, the average monthly trade deficit of the US expanded from US$40 billion to US$80 billion, but its direct trade deficit with China has actually decreased. The expansion of the US trade deficit in the past 8 years mainly came from Mexico, Vietnam, South Korea, Taiwan, China, Canada, and India.

Source: Bloomberg, CEIC, Wind

As long as the overall cost-effectiveness advantage of Chinese goods remains, regardless of whether the US will increase tariffs, the majority of the US trade deficit will still transfer into China's trade surplus. The most direct approach is for the US to purchase goods directly from China. To conclude, under the premise of a globalized trade system, regardless of whether the US raises tariffs or not, the overall balance between the US trade deficit and China's trade surplus is unlikely to change  in the future. 

Source: Bloomberg, CEIC, Wind

This scenario fundamentally lies in the US fiscal policies. We have discussed several times before that the US fiscal spending and deficit have significantly expanded in the past 5 years, leading to a significant increase in the overall import growth. This is the main factor that has caused the US monthly trade deficit to expand from US$40 billion before the pandemic to US$80 billion. The rolling 12-month total fiscal outlays by the US government is shown in Figure 4 below.

Nguồn: Bloomberg, CEIC, Wind

Based on Figure 4 that compared to pre-COVID19, annual fiscal outlays have increased by approximately US$2.5 trillion. At the same time, the US trade deficit has expanded from US$500 billion per year to US$1 trillion. From this perspective, the significant expansion of US fiscal spending over the past 5 years has not only been the biggest driving force behind US economic growth and stock market record highs, but also the main reason for the US exporting excess liquidity to the world, leading to asset price growth in various countries around the world.

However, in China, although the trade surplus has increased significantly, foreign exchange reserves have not risen. This means that the capital brought by the large surplus has not really flowed into the country, but has been retained overseas or invested in various assets overseas. Therefore, A-shares and Hong Kong stocks have not benefited from this.

Therefore, the real question is, if Trump truly wants to reduce the trade deficit, there is only one effective way to do so—significantly reduce US government fiscal spending. Although we have seen Elon Musk talking about cutting US fiscal spending during the establishment of DOGE and the new nomination of US Treasury Secretary Bessent, it simply cannot change the fact that the expansion of US fiscal spending has been the most fundamental supporting factor for US economic growth and global stock market gains in the past 5 years.

From this perspective, no trader in the market currently believes that the US government is likely to reduce its total fiscal spending in the next two years. Therefore, for China's exports, Trump's coming to power does not imply that there is no risk.

Source: Straits Financial