China central bank has Trump headache amid US policy flux
As if defusing the world’s biggest debt bomb while keeping economic growth humming wasn’t tough enough, Donald Trump’s shock election victory has just made the policy outlook even more complex for People’s Bank of China governor Zhou Xiaochuan.
The president-elect’s threats to slap tariffs of up to 45 per cent on Chinese imports cast a shadow over the economy’s stabilisation and the world’s most crucial trade relationship. Protectionism may fuel more international use of the yuan, according to Standard Chartered, while the UBS Group says tariffs may push the PBOC to let the yuan fall further.
Longer-term ambitions like capital account opening and yuan internationalisation are also clouded, hinging on whether president Trump delivers on candidate Trump’s promises.
The PBOC’s monetary policy becomes trickier, and harder to keep neutral, amid “huge uncertainty” about Trump’s impact on China, according to Larry Hu, head of China economics at Macquarie Securities in Hong Kong. “It’s hard to tell what would be actual policies instead of just campaign rhetoric,” Hu wrote in a note.
Even before Trump takes office January 20, there’s reason to think his campaign threats to impose tariffs and label China a currency manipulator may be tempered by the reality of governing. He’s already signalled there may be some watering down of other contentious issues such as building a wall on the Mexican border and scrapping US President Barack Obama’s health care programme.
There’s a low probability that the PBOC will cut its benchmark interest rates or the required reserve ratio for banks this year, Xinhua reported on Tuesday. The central bank has held its main rates at record lows for more than a year to support growth.
President Xi Jinping told Trump in their first conversation that cooperation was the only correct choice for ties between the world’s two largest economies, with the US president-elect promising his counterpart “one of the strongest relationships”.
Economists see some chance that global investors will want to hold more non-US assets, which would help bring China closer to its goal of more use of its currency worldwide. The International Monetary Fund last month added the yuan to its basked of reserve currencies.
“If Trump takes up an anti-globalisation attitude, that’s a chance for the yuan to improve its global status,” said Guan Tao, a former deputy director of China’s State Administration of Foreign Exchange. “There’ll be opportunities for the renminbi. The need to diversify assets persists, if it’s not becoming stronger. China should grasp this opportunity.”
China is tightening capital controls amid outflows, which have continued for the past 20 months, according to Bloomberg Intelligence estimates. Its foreign reserves, the world’s largest stockpile, are down to US$3.12 trillion from a record US$4 trillion in June 2014 amid support for the currency. The yuan fell to a seven-year low of 6.8479 per dollar Monday.
Another challenging scenario: Trump has proposed fiscal expansion that’s boosting inflation prospects, sustaining or even strengthening the surge in US bond yields in recent days. Improving returns in developed nations’ fixed-income markets would make it a risky time for China to relax limits on capital outflows.
At the top of Zhou’s priority list is the domestic economy, where stability remains intact for now. Data Monday showed factory output up 6.1 per cent year on year in October. China has posted three straight quarters of 6.7 per cent growth, four years of factory-gate deflation are over, and its main manufacturing index is at a two-year high.
External risk is always a second concern for China after domestic growth and employment, said Zhang Ming, the director of international investment research at Chinese Academy of Social Sciences, a state-backed think tank in Beijing. “The US recovery and stronger dollar is one of the threats to yuan internationalisation,” Zhang said. “But more threats come from domestic challenges, including weaker economic fundamentals and debt-related risks.”
Some local government debt levels already exceed warning levels, and the ability to repay it is weakening, the finance ministry said on Monday. It also issued an emergency treatment plan for local debt risks and said local authorities in cities and counties should report potential defaults to their provincial governments at least two months in advance.
Such a plan implies the central government is turning back to a more aggressive stance on local government financial vehicles, Zhao Yang, chief China economist at Nomura Holdings in Hong Kong, wrote in a report on Monday.
Trump’s policies may weigh on global growth, according to Goldman Sachs Group. His promised combination of fiscal stimulus, trade tariffs, stricter immigration rules and higher interest rates could prove an overall negative for the world economy, analysts wrote.
On currency policy, Trump seems to present both risk and opportunity for the world’s largest trading nation. The US is China’s largest partner, with US$627 billion in total trade last year.
“Trade protection in the US will not be targeted on China alone,” said Ding Shuang, head of China economic research at Standard Chartered in Hong Kong. “Other countries, especially emerging markets, will also suffer. To retaliate, China is likely to embrace regional trade treaties and speed up the Silk Road initiative to strengthen trade ties with non-US markets. As the US retreats and China steps in, the yuan is likely to be used more globally.”
But with so many doubts, and two months before Inauguration Day, it may be too early to discuss what impact Trump will make, says Yan Se an economics professor at Peking University.
“The uncertainties are rising,” Yan said. “We need to be aware of the risks, but we shouldn’t be too negative on this. Trump is, after all, a businessman, and very practical.”