China to retaliate in a moderate way not to provoke a further escalation - Danske Bank

"China today retaliated against Trump's tariffs. On the surface it looks like a measured response but China is also likely to stop purchases of US agricultural goods and other products," argue Danske Bank analysts.

Key quotes

"However, we believe China will retaliate in a moderate way in order not to provoke a further escalation. We do not expect China to sell US treasuries."

"We continue to see the risk that things will have to get worse before they get better and that it will take financial stress and declines in the stock markets to get Trump back to the negotiation path. So the response from China to Trump's tariff increase came today with the announcement that the tariff rate on US goods worth USD60bn will be raised to up to 25% on 1 June . The USD60bn figure is the same as when Trump launched the initial 10% tariff on USD200bn of Chinese goods. So in that sense the response is symmetrical."

"We would expect China again to halt purchases of a range of agricultural goods, as was the case last year when the trade war was ongoing. In that sense, China is choosing a quota over a tariff response, which last year proved quite efficient. At least, exports to China suffered more than Chinese exports to the US and the US-China deficit increased even more. This year it came down again after China resumed the purchases, but that will stop now."

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