China's Trump problem might not be as bad as everyone thinks
During a campaign speech in August Trump said, "any country that devalues its currency in order to take unfair advantage of the United States and all of its companies who can't compete will face tariffs and taxes to stop the cheat, and when they see that they will stop the cheating."
So how did China respond to news that Donald Trump would become the next president of the United States?
On Thursday, the People's Bank of China fixed its currency, the yuan, at its weakest level in six years. That followed news out in earlier in the week that China's reformist finance minister Lou Jiwei was removed from office.
"Lou Jiwei's abrupt ouster sends a strong signal that any prospects of even limited economic reforms are falling prey to President Xi's focus on consolidating his power," Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund, told the Wall Street Journal.
While Trump's talk is just that for now, China does have to consider the very real threat that a President Trump will deliver on his protectionist ideas.
"Some action - or some sign of potential action - targeting China seems a high-probability scenario, especially at the very beginning of his presidency when domestic policy agendas and formal trade deals may not go through quickly," Wei Yao, Societe Generale's China specialist, wrote in a note to clients on Thursday.
Campaign promises
But Yao, and others, think the specifics of these policies will be far less severe than the campaign-trail promises.
Yao believes a high-tariff is out of the question as Trump wants "fair trade deals" and not a trade war.
Barclays Economic Research team of Michael Gape, Rob Martin and Blerina Uruçi seems to agree. Their base case scenario is a 15% tariff on trade with China, more than double what they expect the tariff to be on trade with Mexico. (Recall that Trump's campaign promise is for a 45% tax on imports.)
"Import tariffs with China may be larger, given that imports from China are about twice as large in dollar terms than Mexico and the trade deficit with China is many magnitudes larger than with Mexico," they wrote.
As for Trump attempting to label China a "currency manipulator," Yao says that cannot happen unless three criteria are met:
- China has a significant bilateral trade surplus with the US
- China has a current account surplus of more than 3% of GDP
- China persistently intervenes in the foreign exchange market
And right now only the first criteria is being met. In terms of number 3, Yao notes that the PBOC "has been endeavoring to prevent the renminbi depreciating too fast against the US dollar." Therefore, China is likely to remain on the Treasury's Monitoring List.
