Trade con­flict

The Pak Banker - - FRONT PAGE -

It is clear that the trade con­flict be­tween China and the US is not only go­ing to slow down global trade and growth but will also im­pact their own economies. In or­der to neu­tralise the neg­a­tive im­pact of trade war, China is al­ready tak­ing steps to sal­vage its econ­omy from cool­ing fur­ther. In this re­spect, China has an­nounced to re­duce the Re­serve Re­quire­ment Ra­tio ( RRR) for both the large com­mer­cial banks and smaller banks by an­other 100 basis points from 15.5 per­cent and 13.5 per­cent, re­spec­tively. It may be men­tioned that the lat­est RRR cut was the fourth this year. The lat­est move is ex­pected to in­ject a net 750 bil­lion yuan ($ 109.2 bil­lion) in cash into the bank­ing sys­tem by re­leas­ing a to­tal of 1.2 tril­lion yuan in liq­uid­ity.

The suc­ces­sive RRR cuts clearly in­di­cate that the Chi­nese­cen­tral bank is wor­ried about ex­ter­nal shocks to mar­kets such as a speech last week by the US Vice Pres­i­dent Mike Pence that ac­cused China of mak­ing "ma­lign" ef­forts to un­der­mine US Pres­i­dent Don­ald Trump, ahead of next month's con­gres­sional elec­tions and reck­less mil­i­tary ac­tions in the South China Sea. Pence's speech in­di­cated a sharp­ened US ap­proach to­wards China, go­ing be­yond the bit­ter trade war be­tween the world's two big­gest economies. Along with ex­pan­sion­ary mone­tary pol­icy, fis­cal pol­icy of the coun­try, ac­cord­ing to Fi­nance Min­is­ter Liu Kun, would also be proac­tive, in­clud­ing po­ten­tial tax cuts on a large- scale to safe­guard eco­nomic growth. To­tal tax cuts for the year are ex­pected to ex­ceed 1.3 tril­lion yuan. The Fi­nance Min­is­ter was also quoted as say­ing that "China has the abil­ity to min­imise the im­pact" and the gov­ern­ment has taken mea­sures to help com­pa­nies im­pacted by the trade war.

For­eign ex­change re­serves of China fell by dol­lar 22.69 bil­lion in Septem­ber, 2018 to dol­lar 3.087 tril­lion com­pared with a de­cline of dol­lar 8.23 bil­lion in Au­gust, 2018. The fall in Septem­ber was the big­gest drop since Fe­bru­ary, 2018. The steps taken by China on the do­mes­tic front ap­pear to be ap­pro­pri­ate and timely to min­imise the im­pact of a trade war be­tween the two big­gest economies of the world though no coun­try in the world would wish this war to es­ca­late and dampen the global growth. China has not only re­lied on the change in stance on mone­tary pol­icy but is also think­ing about ex­pan­sion­ary fis­cal pol­icy that will in­ject an­other 1.3 tril­lion yuan into the econ­omy. The shift in both the mone­tary and fis­cal pol­icy would in­crease ag­gre­gate de­mand in the econ­omy and keep the wheels of in­dus­try run­ning even if de­mand for goods from the US tends to de­cline due to re­stric­tive poli­cies. China is not only tak­ing care of the level of pro­duc­tiv­ity in the econ­omy but is also fo­cus­ing on en­hanc­ing the com­pet­i­tive­ness of its ex­ports in the global mar­ket. Yuan is fall­ing al­most con­tin­u­ously but Bei­jing has not rushed to in­ter­vene in the mar­ket in the be­lief that a weaker cur­rency would sup­port its ex­ports. This is quite con­trary to the per­cep­tion in Pak­istan that a weaker cur­rency is an in­di­ca­tor of a frag­ile econ­omy and a kind of con­spir­acy against the coun­try.

Pak­istan, like other coun­tries, could lose if the con­fronta­tion con­tin­ues to es­ca­late with neg­a­tive con­se­quences on the global econ­omy and our ex­ports. On the other hand, the on­go­ing war could boost the prospects of Pak­istani ex­ports by en­cour­ag­ing Chi­nese pro­duc­ers to re­lo­cate to Pak­istan to avoid puni­tive tar­iffs on their US ship­ments and take ad­van­tage of cheap labour in Pak­istan. This is pos­si­ble due to the prox­im­ity and closer re­la­tion­ship be­tween the two coun­tries. Any­how, it would be bet­ter for the pol­i­cy­mak­ers of the coun­try to mon­i­tor the un­fold­ing sit­u­a­tion closely and be pre­pared to take the nec­es­sary steps in time to avoid un­de­sir­able con­se­quences on the econ­omy.

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