Trump’s troubles offer break for Beijing’s economic policymakers

The political chaos in Washington is making it less urgent for the Federal Reserve to raise interest rates next month, which would ease pressure on Beijing to tighten monetary policy at home

PUBLISHED : Saturday, 20 May, 2017, 12:42pm
UPDATED : Saturday, 20 May, 2017, 12:59pm

While China may be disappointed to see the impeachment of US President Donald Trump with whom the country just built trust, the chaos in Washington could help Beijing to slow down yuan depreciation, curb capital outflows and safeguard domestic market stability.

The continuing drama in Washington about whether the US president committed wrongdoings by attempting to intervene in state investigations has rattled the US stock market – the Dow Jones

Industrial Average plunged 373 points on Wednesday, its biggest single day fall in eight months.

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The political chaos in Washington is making it less urgent for the Federal Reserve to raise interest rates next month, a development that would take pressure off Beijing to tighten monetary policy at home.

“The political troubles of the Trump administration will hit the US dollar index and accordingly ease pressure on the yuan exchange rate and capital outflows,” said Liu Jian, a senior researcher at the Bank of Communications, China’s fifth biggest lender based in Shanghai.

On the surface, the world’s second largest economy has left it worst days behind. China’s headline growth was stronger than expected in the first quarter, and an exodus of funds was suspended thanks to rigid capital controls. The official foreign exchange reserves climbed for the third consecutive month in April, while the yuan’s value against the dollar has remained mostly steady in the past months.

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At the same time, China’s debt mountain is still growing and its financial system remains vulnerable to policy tightening. Economic activity showed softening in April.

Zhang Jun, chief economist of Huaxin Securities, said the Federal Reserve’s rate increase and downsizing the balance sheet will continue to make it difficult for China. Zhang said the Fed was still likely to raise rates in June.

The election of Trump last November and the Federal Reserve’s interest rate rise drove up the US dollar index to a high level of 103, which put huge pressure on China. The Chinese government had to spend much of its hard-earned foreign exchange reserves to prop up the yuan and take certain administrative measures to control capital outflows late last year. The dollar index fell below 98 on Friday in the wake of political gyrations in the US.

Guotai Junan Securities analyst Xie Yunliang wrote in a note that Trump’s trouble may affect his tax cut plans and accordingly slow the Fed’s pace of raising interest rates.

“It will significantly ease pressure on yuan depreciation… and alleviate the pressure on China’s monetary policy,” Xie wrote. “If the US dollar index remains weak, its yuan counterpart may even turn positive in coming months and this will improve domestic liquidity.”

That will buy time for China to clean up its domestic financial market.

Liu from the Bank of Communication said that the biggest pressure was actually from China’s commitment to eliminate financial risks and ensure financial security, as highlighted by President Xi Jinping in late April.