Trump's trade plans could knock China's rise to riches off course

Donald Trump’s trade plans could trash China’s economic growth over the next decade with such a powerful impact that he could prevent the 1.4 billion people in the world’s second-largest economy from joining the elite club of high-income nations, according to a new analysis from Morgan Stanley.

China is on course to defy its doubters and achieve an average annual income per person of more than $12,900 by 2027, breaking out of the middle-income group. This is a rare feat - only Poland and South Korea have managed this in the past 30 years, out of the countries with more than 20 million citizens.

But this epoch-making milestone could be snatched from China’s grasp by a trade war, if President Trump’s policies end up with protectionism soaring around the world.

The bank’s analysts do not see this as their central forecast, but do fear it as a major risk to their predictions of a highly successful period of Chinese growth.

“Externally, the key risk would be extreme trade protectionism. As China is one of the world’s largest trading nations, the impact on China would be significant,” said the paper, written by a group of analysts including economist Chetan Ahya and equity strategist Jonathan Garner.

“Going beyond the direct impact on China’s exports growth, a protectionist environment would adversely affect corporate sentiment. More importantly, with significant manufacturing capacity and with select sectors still facing challenges of excess capacity, extreme trade protectionism would exacerbate existing issues and lead to the re-emergence of deflationary pressures for China.”

It also risks undermining some of the fundamentals of the country’s rapid improvement in living standards, according to the Morgan Stanley report.

“The reduced competition and flow of goods, services and people in a more protectionist environment would reduce the exchange of ideas and slow the rate of technological transfer that has been one of the driving forces of China's rise towards middle income status,” it warned.

Nonetheless the analysts’ central belief is that China is on a strong trajectory. That is in part based on the idea that its recent economic problems including overcapacity in manufacturing sectors such as steel, bad loans to state-owned enterprises, and poor investment in construction are all being brought under control, limiting other factors which could harm growth.