Close links mean little chance of major trade war, says leading expert
The possibility of China and the US engaging in a major trade war is low given their close economic links, said a former central bank adviser.
The US last week initiated an investigation against China, examining the latter’s intellectual property policies and practices under its Section 301 of the Trade Act of 1974. China has expressed strong opposition and said it will take all appropriate measures to protect its lawful interests.
“The possibility of a US-China trade war is slim,” said Yu Yongding, an economist of the Chinese Academy of Social Sciences and a former member of the central bank’s monetary policy committee. “The US has done that, as before, mainly to pressure China to toe its line, but given the two country’s intertwined economic interests, such a war would be detrimental to both,” he said.
Trade between China and the US reached $519.6 billion in value in 2016, according to the Ministry of Commerce. Chinese investment in the US, meanwhile, has surged, reaching $45.6 billion last year, triple its 2015 level.
The US has used the 301 investigation many times, moves that are believed to aim at forcing China to cater to its agenda, such as renminbi revaluation.
“But now the situation has changed, with the US hoping China does not allow the yuan to depreciate,” said Yu. “A weaker yuan would help boost China’s export and reduce US exports to China.”
Yu, who has long advocated that the yuan should be allowed to float freely in accordance with market conditions, suggested that market-guided depreciation of the yuan is not something China should fear.
“The exchange rate of a currency is determined by the economy’s fundamentals and given China’s sound GDP growth, even if the yuan depreciates, it would not slump in an uncontrollable manner,” he said.
The situation would not become uncontrollable, because China has the trump card of capital flow regulation, he said. The central bank can also use the country’s massive foreign exchange reserves to
intervene to stabilize the currency in the worst case scenario.
If the yuan depreciates, it can help China’s control of speculative capital outflows, because it will reduce the gains from capital outflows, he said. “The depreciation can serve as an automatic mechanism to balance cross-border capital flows.”
Yu also said China will face heavier capital outflow pressure if the US raises interest rates as the market expects. “But China can manage to minimize its adverse effect through adopting capital flow regulations.”