Trump presidency would spell trouble for China’s economy, says Daiwa economist

PUBLISHED : Wednesday, 14 September, 2016, 7:38pm
UPDATED : Wednesday, 14 September, 2016, 7:38pm

With the US presidential election less than two months away, a Daiwa economist has warned that a Donald Trump presidency could spell big trouble for China’s economy.

Backed by a popular American view that the US has not received a fair deal since China joined the World Trade Organisation in 2001, Trump advocates a four-point plan to reform US-China trade

policy.

Top of the Trump agendahas been a threat to name China a currency manipulator. The candidate has also said he would force China to uphold intellectual property laws, end China’s export subsidies, and cut domestic US corporate tax, the latter move helping to keep US jobs at home.

As part of his negotiating tactics to force China to acquiesce, Trump has advocated imposing a 45 per cent tariff on Chinese imports to the US.

Daiwa’s Asia chief economist Kevin Lai said such a tariff policy, if it became reality, could mean as much as a 4.8 percentage point reduction in China’s gross domestic product at a time when he sees the country delivering only 6.5 per cent growth this year, slowing to 6 per cent next year. And Beijing would be in no position to retaliate.

“[China] would have to find somewhere else to sell its products. This would exacerbate the overcapacity issues in the economy, putting greater deflation pressure on China, while shrinking China’s capital account surplus position,” Lai said.

“The People’s Bank of China would have to respond with more aggressive policies [such as] cutting rates and printing money which will mean more pressure on the yuan. This will put pressure on China to depreciate the currency. It will be the opposite of what Trump wants to achieve,” said Lai.

If the tariffs became a permanent feature of Washington’s China policy, Lai further warns that China would become a less attractive destination for foreign direct investments. In the wave of repatriation of investments to follow, the mainland could see a further 3.9 per cent reduction in its GDP.

“China’s exports to the US are four times bigger than [US exports to China],” he warned.

Lai explained that Beijing would be in no position to retaliate, even by selling its vast stock of US Treasuries the Chinese central bank holds because that would only push US yields higher, making the US a more attractive investment destination and triggering even greater capital outflow from China.

[China bashing] is getting quite popular. It may eventually be a majority opinion
Kevin Lai, Daiwa Asia chief economist

“It’s not just Trump’s own idea. [China bashing] is getting quite popular. It may eventually be a majority opinion - the sentiment may be reflected in the votes,” Lai said.

Lai doesn’t expect new regional trade developments in Asia, including China’s One Belt One Road policies or the establishment of the 16-country Regional Comprehensive Economic Partnership (RCEP) free trade agreement, as growth drivers that will offset the negative impact.

However, a Hong Kong-based economist speaking on condition of anonymity, disagreed with Lai’s grim picture of vast capital outflows and GDP shock.

“Except for 2011, China has been running negative net export figures since 2009. There is no evidence that justifies the view that China’s exports steals US jobs [that could justify the tariff policy],” the economist said.

“Most foreign direct investment (FDI) in China is not even in export-related sectors anymore. The majority of investment flows are now intended for sectors that could sell into China’s domestic markets. Also, FDI this year is actually negative. China now does more outbound investment than the inbound investment it has receives since last year.”