Trade conflict
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.