As the People’s Bank of China mulls fresh rate cuts, officials might want to consider the laws of physics along with supply and demand.
Newton’s law tells us that every action has an equal and opposite reaction. The economic equivalent holds that additional PBOC easing risks provoking a similar dynamic from the Trump White House. In fact, the odds favor an even bigger one as China’s currency slides in response.
The laws of Trumponomics, after all, are more about resentment and victimhood than stirring animal spirits. And no woe-is-America narrative is more pervasive in the Trump era than China “raping” the US workforce and “stealing” growth from Washington.
An undervalued yuan is a pillar of this theory. It’s “killing us,” as Trump likes to say. Expect Trump’s ire to increase as the yuan weakens past 7 to the dollar – from today’s 6.96 – thanks to PBOC largess. That might provoke him to ratchet up the trade war.
Already, Trump is on the verge of doubling the number of Chinese imports his tariffs currently target – to $500 billion. He is mulling 25% tariffs on cars and auto parts, which would slam the supply chains on which President Xi Jinping’s economy relies.
Odds are, the White House is gaming additional measures to sabotage China’s growth engines.
Xi’s options
So, what are Xi’s options? His desire to jolt growth as exports weaken is understandable. Though Xi is the strongest Chinese leader in generations, his legitimacy rests on rapid gross domestic product growth. That goes for Communist Party bigwigs looking over his shoulder and rural workers tempted to protest an underperforming regime.
Yet a continued yuan slide could be more trouble than it’s worth. Along with provoking a new Trump assault, it might lead to defaults on overseas debt. It also might feed worries that Beijing is losing control of an imbalanced and debt-riddled economy.
Xi would be wiser to get creative. Rather than official cuts in the one-year lending rate now at 4.35%, why not pump liquidity directly into the private sector? The PBOC could create a financing window where executives meeting certain transparency and corporate governance metrics can access cash.
Accelerated infrastructure investments would generate growth with less fallout from Trump’s Washington. Analysts at Standard Chartered recommend other non-monetary steps: tax rebates for exporters; cutting value-added levies; targeted increases in “total social financing;” and reduced property-sector regulations.
Stocks pummeled
Such moves aren’t long-term fixes, of course. That requires Xi’s team to recalibrate growth drivers away from exports toward services. Xi’s “Made in China 2025” scheme aims to do just that, but big moves to catalyze a startup boom and create more space for an energetic private sector are few and far between.
In 2013, Xi pledged to give markets a “decisive role” in all Beijing decision making. Now, his team may be experiencing more of those forces than they’d like as short-sellers pounce. Punters have even taken to shorting yuan proxies, from the Australia dollar to the South Korean won.
As Chinese stocks sustain huge losses, Premier Li Keqiang promises to throw the private sector a lifeline. We’ve seen this movie before, though, and it ends in mediocrity. In fact, the risk is that 12 months from now, private Chinese enterprise is no more vibrant than it is now.
Among the collateral damage from Trump’s trade war is reduced appetite in Beijing for bold structural reforms. On a November 7 press conference, Trump reiterated that his real objective is stopping China raising its game heading toward 2025. He even embellished the extent to which Xi’s team is supposedly reversing course.
“China got rid of their ‘China ’25’ because I found it very insulting,” Trump said, despite all evidence to the contrary. “I said that to them. I said, ‘China ‘25’ is very insulting, because ‘China ’25’ means, in 2025, they’re going to take over, economically, the world. I said, ‘That’s not happening.’”
For Xi to salvage it, he will have to find ways to talk Trump out of going to Defcon 1. How best to do that is anyone’s guess. It’s clear, though, that the yuan weakening too far will have Trump upping the ante yet again.
Such a reaction would create new economic gravity troubles that China really doesn’t need.
Clue?
Clue?
Agreed to the extent that the US Dollar has a value because other countries sell real stuff for the dollars. Now that Trump makes it harder and harder to buy stuffs with dollars, which means the death sentence to the Dollar.
Agreed to the extent that the US Dollar has a value because other countries sell real stuff for the dollars. Now that Trump makes it harder and harder to buy stuffs with dollars, which means the death sentence to the Dollar.
Nuno Cardoso da Silva , yes you are much correct. Chinese should not spend a single dollar to cent to buy US goods. Need to have integrity . American will not thanks China instead it claimed China steal. Who are the American and who they think they are? The American act as though they lost much in gamble and then threaten the casino to close shop or else will get attack from all corners.
Nuno Cardoso da Silva , yes you are much correct. Chinese should not spend a single dollar to cent to buy US goods. Need to have integrity . American will not thanks China instead it claimed China steal. Who are the American and who they think they are? The American act as though they lost much in gamble and then threaten the casino to close shop or else will get attack from all corners.
Trump is good for america. It’s time to let the world know once again that USA is still the gratest country in the world. ????????????
Trump is good for america. It’s time to let the world know once again that USA is still the gratest country in the world. ????????????
Michael Zhao your comments are vulgar and insulting and have little to do with the topic.
Michael Zhao your comments are vulgar and insulting and have little to do with the topic.
Go go go Trump….you started the good fight. This mess is easily resolved if China just fully comply with the agreement. US just want a fair trade that both partners benefit equally in this sense.
Go go go Trump….you started the good fight. This mess is easily resolved if China just fully comply with the agreement. US just want a fair trade that both partners benefit equally in this sense.
Michael Zhao you hit the nail on the head. The United States is definitely the leader and definitely shows great promise at times. However, like you said, it keeps failing its own citizens and caters to the ultra wealthy capitalists.
@Bill Long: The truth can be bitter sometimes, however, it does not mean the person speaking the truth is your enemy or wants to see your demise. They may more likely be a well wisher. Perhaps a little more time needs to be spent reflecting on the issues raised by Michael.
Michael Zhao you hit the nail on the head. The United States is definitely the leader and definitely shows great promise at times. However, like you said, it keeps failing its own citizens and caters to the ultra wealthy capitalists.
@Bill Long: The truth can be bitter sometimes, however, it does not mean the person speaking the truth is your enemy or wants to see your demise. They may more likely be a well wisher. Perhaps a little more time needs to be spent reflecting on the issues raised by Michael.