Will Donald Trump be the elephant in the room at Xi Jinping’s big economic meeting?
US policy will have a major bearing on the Chinese government’s thinking when officials meet next week to thrash out next year’s economic goals, analysts say
As China’s top leadership gather next week to set key economic policies for next year, they cannot neglect three looming threats from across the Pacific – interest rate rises by the US Federal Reserve that may attract money away from Chinese markets, Washington’s confrontational trade stance against Beijing and US President Donald Trump’s tax regime overhaul that might suck long-term investment from China.
While the closed-door annual central economic work conference – the biggest economic policymaking meeting of the ruling Communist Party elite – is unlikely to specifically mention Trump and his policies in its final statement, the three issues have become elephants in the room for Xi and his team formulating China’s economic policies, according to analysts.
The Fed is only halfway through its programme of raising interest rates and shrinking its balance sheet – a process that will continue throughout 2018 after an expected quarter of a percentage point rise on Wednesday. Coupled with a corporate tax cut that may become US law starting from next year, China and other emerging countries are set to face greater pressures of an exodus of capital and currency depreciation.
For China in particular, Washington and Brussels are ramping up pressure on trade, especially within the World Trade Organisation, a development that could make it harder for China to export products to key markets.
As WTO trade ministers gathers in Buenos Aires this week, the US is publicly questioning the world trading system that has helped China boom over the past 16 years.
A sense of “nervousness” is also felt among Chinese government advisers and even policymakers after Trump managed to push through his tax overhaul plan through the House of Representatives and the Senate, according to Huo Jianguo, the former research head at China’s commerce ministry.
Huo said the Trump tax bill, which simplified seven tiers of personal income taxes into three and cut the top corporate tax rate to 20 per cent from 35 per cent, could set in motion a global race to slash taxes to attract capital at a time when Beijing is already struggling to retain and attract foreign investors.
“When the panic is over, the conclusion is that the impact will not be huge and it will take time for the US to fully implement the new tax policy,” he said.
The Chinese government has been paying lip service to tax cuts for years, but has boasted 1 trillion yuan (US$150 billion) worth of reduced tax burdens by shifting from business to value-added taxes. Data from China’s finance ministry, however, shows the government’s fiscal revenues grew 8.4 per cent in the first 11 months of the year from a year earlier – a rate higher than the headline economic growth rate.
A global competitiveness report released by the World Economic Forum in September suggested China’s overall tax burden was 68 per cent, which put it 132nd among the 137 economies studied. The rate was 44 per cent in the United States, 48.9 per cent in Germany, 30.9 per cent in Britain and 19.1 per cent in Singapore.
David Dollar, a senior fellow at the Washington-based Brookings Institution, said the US tax cuts would increase the nation’s fiscal deficit and raise the value of the US dollar. This development, in turn, could lead to a bigger US trade deficit and further harm US-China trade relations.
“The US trade deficit will worsen because of these US policies, but there is a risk that the administration will blame China and other partners and introduce protectionist measures,” he said. “I expect US-China trade relations to be volatile going forward.”
The trade gap between the world’s two largest economies has been a frequent cause for complaint from Trump since he was on the election campaign trail.
China is the largest source of the US’ trade deficit, with a deficit of US$347 billion in 2016 according to US figures. Beijing said the nation’s trade surplus with the United States in the first 11 months of this year reached US$251.3 billion, compared with US$250.7 billion in the whole of 2016, although China has repeatedly promised to buy more from the US.
Stephen Schwartz, head of Asia-Pacific sovereign ratings at Fitch Ratings, said the US administration was likely to continue with its focus on reducing the trade deficit with China, although it may not cripple China’s exports immediately.
“The debate about China gaining ‘market economy status’ by default of its 15 years membership [in the WTO] could be used as a trigger point for further US pressure on China,” Schwartz said.
Global trade growth could also continue to help China’s economic expansion, he said.
Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, said China was now economically powerful enough to withstand pressure from the US.
“There will be frictions and cooperation in Sino-US trade relations down the road, however, the US will not be able to cause big troubles for China either under the existing WTO mechanism or by introducing a new set of rules.”
Schwartz said China’s closed capital account would give its central bank some degree of autonomy in how it adjusted its monetary policy to handle pressures from capital leaving the country.
“We would expect the central bank to maintain a tight bias on interbank liquidity, which it has already been doing as part of its campaign to rein in financial risks and leverage,” he said.
UBS economists led by Wang Tao wrote in a note that China’s central bank may be forced to raise benchmark interest rates in the third quarter of next year if the US Fed increased rates more than twice in 2018 – a move likely to put strain on borrowers in China.