Impact of tariff conflict on China’s domestic economy

This article attempts to quickly study the impact of the current Sino-US conflict on the economy if it does not escalate further. It uses AI tools such as Grok and Doubao to query information and data, and uses relatively rough estimates. There are inevitably some errors, please feel free to correct them.

Conclusion:

1. China’s main problem at present is debt, but it has been brought under control in the short term; population is a long-term problem and will not “collapse” anytime soon, and other aspects are very resilient;

2. If the base case is maintained under the current circumstances, the Sino-US conflict does not escalate further, and without considering stimulating domestic demand, GDP may suffer a negative impact of 10 percentage points;

3. However, if a consumption stimulus of 2 trillion yuan is taken into account at the same time, it is estimated that 6-8 trillion yuan of consumption can be driven, which can offset 5 percentage points of GDP impact; the overall negative impact is about 5 percentage points. 

Structurally:

1. Exports are poor (may have a negative impact equivalent to 10% of GDP, which is not easy to hedge), and demand that will be affected by the shift from exports to domestic demand is also poor (supply exceeds demand, there is price pressure, and the profit side will significantly amplify the impact);

2. Private investment-related demand is very poor (it may decline sharply), but considering that government investment is relatively good, overall investment may be flat;

3. Domestic consumption is relatively better (if not stimulated, it may be negatively affected by 5% of GDP, but considering that stimulation may be flat), the direction that is more likely to be stimulated is still home appliances, automobiles, mobile phones, etc., which have large output values, long industrial chains, and good stimulus effects. 

China's countermeasures & responses:

1. Establish new partnerships and stimulate domestic demand;

2. Retaliatory tariffs, trade restrictions, etc;

3. Selling US bonds and competitive devaluation are probably not advisable.

The following is the text:

There are roughly two scenarios for the subsequent evolution of the Sino-US conflict: one is that if the Sino-US conflict does not escalate in the short term, and other regions are relieved through negotiations with the United States; the other is that the Sino-US competition spirals and escalates, and other regions are not relieved or even the conflict escalates. At present, the first one is more like the base case. 

I. China's response and countermeasures

1. Retaliatory tariffs, trade restrictions, investigation sanctions, and reduced purchases of US goods: for example, a 34% tax on US goods, restrictions on the export of rare earths, defense, aerospace and aviation products, etc.;

2. Competitive devaluation? There are constraints, and the devaluation cannot be too much and too fast to form devaluation expectations, which will seriously hurt other exporting countries (these countries are relatively fragile and more prone to crises), which is inconsistent with China's ideal of becoming a regional leader;

3. Sell US debt? There are constraints, and knocking down the price will hit itself;

4. Seek to establish new regional cooperation relationships and find allies and partners;

5. Stimulate domestic demand: for example, the market expects 2 trillion consumption stimulus and 10 trillion special government bonds;

6. Exports: Detour to other countries to the United States, the risk is that other countries may cooperate with the United States to increase taxes/obstruct. 

If other countries negotiate low tariffs, China can learn from Russia and re-route.

Let me explain why selling US debt is constrained:

1. Foreign exchange reserves are shrinking, and selling US debt is also selling yourself;

2. It leads to passive appreciation of the RMB, which makes exports worse;

3. The global stock and bond markets are turbulent, liquidity may be a problem, and capital outflows from emerging markets are intensifying. Some countries may face national risks, which is contrary to China's goal of uniting some allies;

4. US debt is the core global collateral, which requires additional margin for assets secured by it, resulting in asset selling and a vicious cycle.

II.Does the country have the confidence to carry on: It is very likely!

1. There is debt pressure in the country, but the spending ability and leverage ability of local finances are currently controlled, and real estate is also strictly controlled. There is no risk of further deterioration for the time being, and other problems are left for long-term resolution;

2. There is uncertainty in the management of residents and corporate expectations (confidence);

3. Foreign reserves (large), foreign debt (not high), and dependence on foreign capital are all healthy. More than half of the trade is settled in RMB, reducing dependence on the US dollar, and the proportion of US debt held in foreign reserves continues to decline (currently 24%).

Among them:

Foreign exchange reserves: As of the end of March 2025, foreign exchange reserves were 3.2 trillion, ranking first in the world, covering 14.4 months of imports, far higher than the recommended safety level of 3-6 months; the proportion of US debt in the holding structure has continued to decline, and now it is less than 25%:

1) US debt holdings, from 818.1 billion in 24 years to 760.8 billion in January 2025, accounting for 24% of reserves;

2) Gold: reached 73.7 million ounces (~2,292 tons) in March 2025, accounting for 7% of foreign exchange reserves (based on a gold price of US$3,000/ounce);

3) Other foreign debts: short-term foreign debts are 1.36 trillion, long-term foreign debts are 1.06 trillion, and the foreign reserves have a high debt coverage ratio; increase the proportion of RMB in cross-border settlements and reduce dependence on the US dollar.

2010: RMB internationalization started, when the proportion of RMB in cross-border trade settlement was only 2%-3%, mainly concentrated in trade with Hong Kong and ASEAN countries. 2015: With the expansion of the cross-border trade RMB settlement pilot project and the launch of CIPS (Cross-border Interbank Payment System), the proportion of RMB settlement grew rapidly to about 20%. 2020: Affected by the COVID-19 pandemic and global financial market fluctuations, the proportion of RMB settlement declined, but then rebounded rapidly in 2021-2023. 2022: According to official data, the amount of RMB cross-border trade in goods settlement reached 7.92 trillion yuan, a year-on-year increase of 37%, accounting for about 22% of the total trade. But this proportion will rise further in 2023 and 2024, especially in trade with Russia, Brazil, Argentina and other countries.（Data source: Grok）

Based on recent market trends and policy moves, the proportion of RMB in import and export settlement is expected to continue to rise in 2025, possibly reaching 55%-60%, especially in trade with developing countries. However, the global dominance of the US dollar will not be shaken in the short term. Some posts on X reflect the market's optimism about the internationalization of the RMB, believing that the increase in the RMB settlement ratio from 2% to nearly 50% is "real internationalization", but these statements should be treated with caution, as official data and market realities may differ.（Data source: Grok）

2022: The US dollar accounts for about 55% of cross-border trade settlements, the RMB accounts for about 22%, and other currencies (such as the euro and the yen) account for 23%. 2023: The US dollar's share drops to about 50%-52%, the RMB rises to about 42%-45%, and the share of other currencies remains stable. 2024: The US dollar's share further drops to 47%-50%, and the RMB's share rises to 47%-50%, which is basically the same as the US dollar. January-April 2025: Preliminary estimates show that the US dollar's share may be between 45%-50%, and the RMB's share is close to or slightly above 50%.（Data source: Grok）

III. Impact on the domestic economy

1. Impact on export-related economies

• Exports to the United States are directly affected, with more than 400 billion US dollars, 3 trillion RMB, and less than 3% of GDP;

• the impact on other regions is mixed:

1) If other regions do not contain China, the demand for imports from other regions to China may improve (re-route effect). The overall impact on GDP is less than 3 points; 

2) If other regions contain China, China's local manufacturing may have to move abroad, resulting in excess capacity in stock, and excess capacity will be turned to domestic sales, leading to deflationary pressure. The impact on GDP may be 5+ points;

3) If other regions are also hit hard by tariffs, it may affect their import demand, and then affect China's exports to them. China's total exports are 3.6 trillion US dollars a year, 27 trillion, equivalent to 20% of GDP. If export demand declines by 20% (after the financial crisis in 2008, China's exports declined by 16% in 2009), it means an impact of 4 points on GDP.

Data source: Wind

2. Impact on domestic demand and investment

• After the tariffs were imposed on the United States, some American goods have increased in price, and residents' purchasing power has declined, affecting demand. Some demand may not be transferred to local brands;

• Lack of confidence, residents are unwilling to consume, and enterprises are unwilling to invest, affecting consumption and investment;

China's total fixed asset investment is 52 trillion yuan, accounting for 38% of GDP, non-private investment is 26 trillion yuan, and private investment is 26 trillion yuan; if private investment declines by 50%, state-owned enterprises and government investment will increase by 10-15 trillion yuan, and the overall investment impact on GDP may be eliminated.

• Exports to domestic sales may lead to deflationary pressure and erode corporate profits more.

China's manufacturing profit margin is generally lower than the global average, about 2.59%-6.09% (depending on the industry and year). If prices fall by 5%, profits may be affected by half (assuming that enterprises will control opex and capex). Enterprises controlling opex may involve layoffs and salary cuts, weakening consumer demand.

If the personnel cost control range is 10%, it may save 1 point of profit margin (estimated), and the private economy accounts for an estimated 60%. If the personnel cost is controlled by 10%, it will approximately affect the income of 60% of the working population (700-800 million) by 10%, which may affect their and their family consumption. It is estimated that the affected population will spread to 1 billion? Consumption will decrease by 20%? (With more savings, consumption will decrease more than income), and it is speculated that consumption may be negatively affected by 15%?

China's total retail sales are 49 trillion yuan (2024), accounting for 36% of GDP. If it declines by 15%, it will correspond to 7.5 trillion yuan, affecting GDP by 5-6 percentage points.

Based on the above analysis, considering the impact of consumption, net exports, and investment, GDP may be affected by 9-10 percentage points.

If consumption is stimulated by domestic demand, it may offset some negative impacts, 5 percentage points?

In 24 years, automobile subsidies cost 60-70 billion yuan, achieving a 5% increase in automobile sales (otherwise it is estimated to have declined). If it is calculated based on the 5-point positive industry consumption pull, it means that it has driven sales of 200-250 billion yuan.

If there is a 2 trillion yuan consumption stimulus this year, according to similar logic, it may leverage 3-4 times the consumption amount, that is, 6-8 trillion yuan, and affect GDP by 5 percentage points.

Key Points

• Research shows that the Chinese government's total expenditure on automotive subsidies in 2024 was approximately 67 billion yuan, mainly implemented through the "trade - in" program.

• This estimate is based on 37 million consumers participating in the program. The subsidy for new energy vehicles reached 20,000 yuan per vehicle, and for fuel - powered vehicles, it was 15,000 yuan per vehicle. New energy vehicles accounted for about 60%.

• The data may be subject to some uncertainty. The specific amount may range from 66.6 billion to 68.5 billion yuan. It is necessary to refer to official reports for confirmation.

After the financial crisis in 2008, GDP growth fell by 10 percentage points in 2009 (there was a 4 trillion stimulus in 2009).

Data Source：Wind

Reference: Global circulation of oil after Russia was sanctioned during the Russia-Ukraine conflict (from Grok research)

Key Points

• Research shows that after the Russia - Ukraine conflict, Russian oil mainly flows through Asian markets (such as India, China, and Turkey), using "shadow fleets" and third - party intermediaries to bypass Western sanctions.

• Evidence indicates that trade efficiency has decreased due to increased transportation distances and rising costs, with an additional cost of about $10 - $15 per barrel.

• As of April 9, 2025, the price of Urals crude oil is $65.49 per barrel. It is lower than the price peak in the early days of the conflict but still higher than the Western - set price cap of $60 per barrel.

Modes of Circulation

The export of Russian oil has shifted from traditional Western markets to Asia, mainly due to Western sanctions. Data shows that in 2023, Russia's oil export volume remained stable at around 7.5 million barrels per day, mainly flowing to India, China, and Turkey [1]. The mode of transportation has also changed. Russia uses "shadow fleets" and third - party intermediaries to evade sanctions, which increases the complexity of logistics but ensures the continued export of oil.

Differences in Trade Efficiency

Trade efficiency has significantly declined, mainly for the following reasons:

• The transportation distance has lengthened. For example, the transportation time from Russia to India has extended from a few days to a month [3], resulting in an additional cost of about $10 - $15 per barrel.

• The use of shadow fleets and alternative insurance services has increased costs and time, reducing efficiency.

• Sanctions have restricted Russia's access to Western financial systems (such as SWIFT), further increasing the cost of trade logistics [4].

Impact on Oil Prices

In the early days of the conflict, oil prices soared due to geopolitical tensions. Brent crude oil prices rose by $41.49 (56.33%), and WTI prices rose by $37.14 (52.33%) [2]. As of April 9, 2025, the price of Urals crude oil is $65.49 per barrel [5], compared with the Brent crude oil price of $63.15 per barrel on April 7, 2025 [6], but it is still higher than the $60 - per - barrel price cap set by the West [3].

Detailed Report: The Current Situation and Impact of Russian Oil Trade

The following report provides a detailed analysis of the circulation modes, changes in trade efficiency, and the impact on oil prices of Russian oil after the Russia - Ukraine conflict (starting in 2022), based on the latest data and reliable sources to ensure comprehensiveness and accuracy.

Background and Overview

After the outbreak of the Russia - Ukraine conflict, Western countries imposed severe economic sanctions on Russia, especially targeting its energy exports. As the world's third - largest oil producer and largest net exporter, Russia's oil trade has been significantly impacted [1]. Nevertheless, Russia has continued to maintain exports by adjusting its trade strategies, especially with the support of demand in Asian markets.

Circulation Modes of Russian Oil

Research shows that the export routes of Russian oil have undergone major changes. Judging from the 2023 data, Russia's oil export volume remained stable at 7.5 million barrels per day. The export of crude oil declined slightly, but the increase in refined oil product exports compensated for this gap [1].

• Market Shift to Asia: Imports from traditional Western markets such as the EU, the United States, and the United Kingdom have 大幅 decreased. The share of Russian oil in the EU in the fourth quarter of 2023 dropped to 3.5% from 24.8% in the fourth quarter of 2021 [3]. Meanwhile, Asian markets have become the main export destinations, especially India, China, and Turkey.

• Transportation Mode Adjustment: To evade Western sanctions, Russia has adopted "shadow fleets" (tankers from non - Western countries) and third - party intermediaries to maintain exports [3]. For example, Russia exports crude oil to China through the East Siberia - Pacific Ocean pipeline, bypassing maritime transportation restrictions [3].

• Export Volume and Discount: Despite stable export volumes, Russia's oil and natural gas revenues in 2023 decreased by 24% compared to 2022, mainly due to discounts in Asian markets and fluctuations in global oil prices [3].

Changes in Trade Efficiency

Trade efficiency refers to the cost, time, and resource utilization efficiency of oil from production to consumption. After the conflict, Russia's oil trade efficiency has significantly declined, mainly due to the following reasons:

• Increased transportation distance: The transportation distance from Russia to Asian markets has significantly extended. For example, the transportation time to India has increased from a few days to a month [3]. This results in an additional transportation cost of about $10 - $15 per barrel, significantly increasing the total cost.

• High cost of alternative logistics: The cost of using shadow fleets and alternative insurance services is higher than traditional methods. For example, freight rates in Asian markets have increased, partly due to the additional costs of bypassing Western sanctions.

• Restricted financial system access: Sanctions have excluded Russia from Western financial systems such as SWIFT, increasing the complexity of payments and trade financing, and further reducing efficiency [4].

• Limited market access: Western sanctions have restricted Russia's access to traditional markets, forcing it to rely on Asian markets. However, the demand and price - negotiation power in Asian markets are relatively weak [3]. Overall, the decline in trade efficiency is reflected in higher logistics costs, longer transportation times, and lower profitability.

  
  

Impact on Oil Prices

Oil price is a core indicator of Russia's oil trade, and the conflict has had a significant impact on it:

• Initial price surge: After the conflict broke out, geopolitical tensions led to a sharp increase in oil prices. According to research, from October 1, 2021, to August 25, 2022, the price of Brent crude oil rose by $41.49 (56.33%), and the price of WTI rose by $37.14 (52.33%) [2]. This increase was mainly due to market concerns about supply disruptions.

• Price fluctuations and discounts: As time went on, oil prices fluctuated. Russian oil in Asian markets is usually sold at a discount. For example, in January - November 2023, the discount was about $17 per barrel [3].

• Current price situation: As of April 9, 2025, the price of Urals crude oil was $65.49 per barrel [5]. In contrast, the price of international benchmark Brent crude oil was $63.15 per barrel on April 7, 2025 [6]. Although the price of Russian oil is higher than the $60 - per - barrel price cap set by the West [3], the discount in Asian markets reflects the impact of sanctions on its pricing power.

• Long - term trend: Research shows that the conflict led to a price breakpoint in March 2022, changing the long - term trend of oil prices [2]. Future prices may continue to be affected by geopolitical tensions and global demand changes.

  
  

Policies and Future Outlook

The G7 price cap of $60 per barrel imposed by Western countries aims to limit Russia's oil revenues. However, research shows that this measure has limited effectiveness. Russia continues to maintain high - price sales through pipeline exports (such as to China) and shadow fleets [3]. In the future, Russia may further rely on Asian markets while facing the persistent pressure of Western sanctions.

Conclusion

After the Russia - Ukraine conflict, Russian oil continues to flow through Asian markets and alternative logistics methods, but trade efficiency has significantly declined due to increased transportation costs and extended distances. Oil prices soared in the early stage of the conflict. Currently, the price of Urals crude oil is $65.49 per barrel (April 9, 2025), reflecting the impact of sanctions and market adjustments.