China may de­liver fis­cal punch in its trade war on US

The Daily Telegraph - Business - - Business - By Tom Rees

BEI­JING’s threat to fight fire with fire in its es­ca­lat­ing trade spat with Wash­ing­ton had one cru­cial prob­lem.

Af­ter Don­ald Trump warned that the White House was lin­ing up a fur­ther $100bn of tar­iffs on Chi­nese prod­ucts, Bei­jing ran out of US im­ports to ramp up taxes on.

Some $550bn of prod­ucts em­bla­zoned with the Made in China stamp flooded the United States last year. A mere $130bn made the jour­ney across the Pa­cific to the Asian pow­er­house. Bei­jing would have to go back to the draw­ing board.

A cur­rency war – the use of mon­e­tary pol­icy to de­value a cur­rency to gain an ad­van­tage in in­ter­na­tional trade by mak­ing ex­ports cheaper, also known as com­pet­i­tive de­val­u­a­tion – is one method for Bei­jing to even out the odds in a trade skir­mish be­tween the world’s two largest economies.

An­a­lysts be­lieve that Bei­jing is mulling a de­val­u­a­tion of the Chi­nese yuan as a hid­den weapon in its trade war ar­se­nal. If the yuan sank against the dol­lar, it would make Chi­nese goods cheaper for Amer­i­can cus­tomers.

If pro­posed tar­iffs were even­tu­ally put on im­ports from China, the de­val­ued yuan would off­set, or at least mit­i­gate, the ef­fect of tar­iffs slapped on im­ports.

Chi­nese ex­porters would re­gain their com­pet­i­tive ad­van­tage against their US ri­vals bur­dened with higher costs in labour and ma­te­ri­als and more strin­gent reg­u­la­tion.

Se­nior Chi­nese of­fi­cials are said to be in­ves­ti­gat­ing the pos­si­ble ef­fect of a risky de­val­u­a­tion of the cur­rency and as­sess­ing how it could be used as a bar­gain­ing chip in trade ne­go­ti­a­tions with the US.

The use of cur­rency de­val­u­a­tions to stay ahead of the game in in­ter­na­tional trade is a well-trod­den path.

In the Thir­ties, coun­tries ditched the gold stan­dard to lower their cur­ren­cies to nudge ahead of the com­pe­ti­tion dur­ing the Great De­pres­sion.

While China has a his­tory of cur­rency ma­nip­u­la­tion, past ex­per­i­men­ta­tion makes it less likely that Bei­jing will use for­eign ex­change dark arts to bol­ster its econ­omy again.

The Peo­ple’s Bank of China shocked mar­kets in 2015 by de­valu­ing the yuan as part of the coun­try’s at­tempt to boost slow­ing ex­ports.

“Chi­nese au­thor­i­ties had to en­gage in a sub­stan­tial fis­cal pol­icy pro­gramme to break the vi­cious cy­cle,” said Hartwig Kos at SYZ As­set Man­age­ment, adding: “While cur­rent cir­cum­stances are dif­fer­ent, it is still not in the in­ter­est of Chi­nese au­thor­i­ties to risk po­ten­tial mar­ket dis­rup­tions.”

Econ­o­mists warn that a re­peat would send shock waves across mar­kets again. De­valu­ing cur­ren­cies is “never an ef­fec­tive tool” in a trade war and would “do more per­ma­nent harm than good”, UBS Wealth Man­age­ment’s Ge­of­frey Yu warned.

“[It] would be so dam­ag­ing to growth and mar­ket sen­ti­ment that it would hurt China more than the US.

“No one in China is re­ally think­ing about this in a se­ri­ous sense.”

It is just “re­mind­ing the US that they have the tool avail­able”, ac­cord­ing to JP Mor­gan As­set Man­age­ment’s Han­nah An­der­son.

“Af­ter the overnight ren­minbi de­val­u­a­tion in 2015, it took Bei­jing con­sid­er­able time and ef­fort to re-an­chor mar­ket ex­pec­ta­tions, calm volatil­ity, unify on and off­shore yuan mar­kets, fig­ure out the most util­i­tar­ian cur­rency man­age­ment scheme, and most im­por­tantly, halt cap­i­tal out­flows.”

Dur­ing his pres­i­den­tial cam­paign, Mr Trump vowed to name and shame coun­tries that ma­nip­u­late cur­ren­cies to gain an ad­van­tage in in­ter­na­tional trade but he is yet to for­mally point the fin­ger. Mar­kets were nervy ahead of the US trea­sury’s semi-an­nual for­eign ex­change re­port re­leased last week. The US re­sisted tar­get­ing just China, also nam­ing Ja­pan, Ger­many, In­dia, South Korea, and Switzer­land on its “closely mon­i­tor­ing list”.

China only meets one of the cri­te­ria on the US trea­sury’s ma­nip­u­la­tion hit list, ING said: its “sig­nif­i­cant” trade sur­plus with the US.

How­ever, it can­not be ac­cused of pur­posely keep­ing the yuan weak against the dol­lar or hold­ing a “ma­te­rial” cur­rent ac­count sur­plus.

Mar­ket an­a­lysts warn, how­ever, that the White House is still ramp­ing up the pres­sure on trade.

Mr Trump’s shock U-turn last week on the Trans-Pa­cific Part­ner­ship (TTP), a free-trade pact with 11 Asia-Pa­cific na­tions which the US had pulled out of, was not the pres­i­dent soft­en­ing his ap­proach on trade but the Trump ad­min­is­tra­tion be­gin­ning to tighten the net around China.

“The TPP it­self is ob­vi­ously an anti-China struc­ture,” Rabobank’s Michael Ev­ery said.

“You need al­lies to beat China on mul­ti­ple fronts. Push­ing Canada and Mex­ico away from the US into China’s arms would be a huge strate­gic er­ror, while the rest of Asia would prob­a­bly slowly slip the same way.”

If Mr Trump for­mally re­leases a $100bn tar­iff hitlist on Chi­nese im­ports, the ball will be back in Bei­jing’s court.

Af­ter re­tal­i­at­ing to the first round of tar­iffs, vice-min­is­ter of com­merce, Wang Shouwen, gave this bat­tle cry to re­porters: “There will be no win­ners, but we are also not afraid of it… if some­one in­sists on start­ing such a war, we will fight till the end.”

In the trade war of words, for­eign ex­change mar­kets have been con­spic­u­ous by their ab­sence thus far.

At the mo­ment, its bark is worse than its bite but backed into a cor­ner, Bei­jing could be tempted to drag cur­ren­cies on to the bat­tle­field.

Ship­ping con­tain­ers at a port in Qing­dao, in China’s Shan­dong prov­ince, are ready to move. Some $550bn of Chi­nese prod­ucts flooded into the United States last year while only $130bn went the other way

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