#TariffPause Chinese consumers could theoretically absorb the impact of the collapse in exports to the United States, but only with government support that is far greater than what current policymakers seem willing to provide, according to analysts at Capital Economics.
"Retail sales in China are more than ten times larger than the country's exports to the US," the firm noted, suggesting that only a 4% increase in domestic goods consumption over two years is needed to offset a potential hit of RMB2 trillion from US tariffs.
However, "this would require policymakers to increase fiscal transfers to households far beyond what they have announced so far."
Retail sales rose 5.9% year-on-year in March, the highest in 14 months, but Capital Economics warned that the increase was "largely" due to a trade-in scheme for consumer goods.
"While it could have a major impact on the composition of consumption, it only increases household purchasing power by the amount of the subsidy itself," the firm said, adding that the trade-in incentive of RMB300 billion this year amounts to just 0.2% of GDP.
The firm noted that real income growth slowed in the first quarter, and without larger fiscal transfers, they see little chance for recovery.
Lower household savings could provide another path to stronger consumption, but it would require "households to be more confident about their finances," which may depend on a recovery in housing prices, according to Capital Economics.
"If housing prices remain under pressure and the trade war weighs on broader confidence, the government must convince households to reduce their precautionary savings," the firm said.
Although further policy support remains possible, Capital Economics remains "skeptical that Chinese households will receive enough assistance to allow their spending to fully offset the loss of demand from the US."