Trade barriers could see RMB weaken in retaliation – panellists

China dealt with unpredictability of US administration by letting RMB appreciate, but a trade barrier could reverse this trend

Going too far: China's patience could run dry if the Trump administration goes ahead with trade barriers

If the US administration goes ahead and implements trade barriers with China, the renminbi’s exchange rate against the dollar could see a sharp reversal as Chinese policymakers retaliate by putting an end to the appreciation trend seen over the past six months, panellists at the 13th annual FX Week Asia conference said.

Richard Jerram, chief economist at the Bank of Singapore, told delegates that as the US has shifted from a framework of predictability to a transactional policy stance, China has dealt with this by letting the renminbi appreciate against the greenback.

“The US has swung from 60–70 years of being ideological and predictable to becoming transactional, meaning they simply do what they perceive to be in the short-term interest of the country,” said Jerram.

“So far, China has coped with this unpredictability by letting its currency appreciate and that’s pulled up a lot of other Asian currencies as well on its coattails, but I think there is a limit to how far that can go,” he added.

Jerram noted that for China, which remains a relatively closed economy, the cost of moderate currency appreciation is quite low, while the potential policy benefits of such a move could be high when dealing with the US administration.

“The question, is how do they respond if the US does push ahead with trade barriers? You would have to guess that in retaliation they would let the currency go down. That would be a logical way of trying to discourage the States,” he said.

America first

US president Donald Trump has repeatedly threatened to impose trade barriers on China, both during his election campaign and as recently as August 25. The new administration has also heralded in an era of Twitter announcements, built on the promise of putting America first.

David Mann, chief economist for Asia at Standard Chartered Bank, said the danger is that the president will be unable to deliver on his promises of growth and a raft of domestic fiscal stimulus measures.

“I think the ‘America first’ policy is nothing new. They have always put America first. We were talking about the ‘do nothing Congress’ even under Obama and it’s even more extreme now. They can’t even repeal Obamacare. These failures leave no room to stimulate growth in any way they can think of,” Mann said.

Jerram said this inability to demonstrate success at home could raise the possibility of becoming more aggressive internationally and pushing ahead with trade barriers. Of the US election promises, the border adjustment tax looks dead in the water and equally promised tax reform plans are also unlikely to materialise, he noted.

All the trade people in the US government have a long history of not understanding economic theory and a history of antagonism towards China
Richard Jerram, Bank of Singapore

“From a global perspective, the best probability is that they do nothing. The good news would be [if] they also do nothing on trade policy. That’s the risk really – what happens to trade policy,” Jerram said.

He described president Trump’s tax-reform plans as a fantasy and a one-page document, double spaced. 

“All the trade people in the US government have a long history of not understanding economic theory and a history of antagonism towards China. I think there is a fairly high risk they will push the trade barriers, especially if they don’t get results domestically,” he said.

Mann added that from China’s perspective, the outcomes so far have been fortunate. While the renminbi strengthened against the dollar, on a trade-weighted basis the currency depreciated.

“China got lucky because they still managed to get a little bit of trade-weighted depreciation while the renminbi got stronger. Stability and capital controls have been the key way they’ve achieved this and I don’t think they will make a lot of changes,” he said.

2020 GDP goals to dominate

The International Monetary Fund (IMF) recently upgraded China’s growth forecast, despite including a warning about the country’s debt levels.

Jochen Schmittmann, Singapore’s resident representative for the IMF, said the main reason for the upgrade was the government’s commitment to achieve its target of doubling real GDP growth by 2020 compared with the base year of 2010.

The IMF now expects the world’s second-largest economy to have average growth of 6.4% between 2018 and 2020, compared with its previous estimate of 6%. However, this growth comes at the cost of higher debt.

We have seen excessive leverage build up and faster liberalisation than the government would have wanted. All of this had one objective: SDR inclusion
David Mann, Standard Chartered Bank

According to the IMF report, net capital outflows from China reached a near record of $647.4 billion in 2015 (5.8% of GDP) and amounted to almost $640 billion (5.7% of GDP) in 2016. In the wake of the tighter enforcement of capital flow-management measures, outflows have since moderated.

“In the last few years, we have seen excessive leverage build up and faster liberalisation than the government would have wanted. All of this had one objective: SDR [Special Drawing Right] inclusion,” said Mann.

“As soon as that was achieved, we have gone a bit backwards with the capital controls. I think this is going to stay in place for a while – certainly as the US removes its emergency monetary policy positioning – as China tries to stem capital outflows,” he added.

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