Investment Strategy  

11/05/2017

China to take control of Asian trade

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As America scales back its central role in global trade, China looks set to seize the opportunity.
Concerns about a near-term Chinese hard landing have subsided, thanks to the stimulatory measures announced last year.


 

Any US retreat from globalisation is likely to be seized on by China as an opportunity to take advantage of the resulting vacuum. This was the message put forward loud and clear by Xi Jinping at the latest World Economic Forum in Davos.

The Trump administration’s decision to ditch the TPP agreement is positive for China since, from a political perspective, it had essentially amounted to an “anyone but China” deal. As such, the US retreat offers an opportunity for China to expand its influence in Asia. A Chinese-led regional trade agreement could partially offset the lost opportunity for the Asian countries that were part of the TPP.

And by including Korea as well as the rest of ASEAN (Association of Southeast Asian Nations), the RCEP (Regional Comprehensive Economic Partnership) talks led by China will have a broader impact on Asia than the TPP. In fact, for many Asian partners, China is already a larger export market than the US, with much better growth prospects.

On a less positive note, the return of inflation does mark the end of the improvement in Chinese monetary conditions. But the reversal is only beginning. There is little evidence so far that credit expansion, particularly to the legacy industries that are major consumers of commodities, is slowing. Meanwhile, last year’s monetary and fiscal stimulatory measures have clearly reduced near-term downside risks for the Chinese economy, which is currently running at the high end of its policymakers’ growth target.

China a currency manipulator, really?
Current US law (the Trade Facilitation and Trade Enforcement Act of 2015) prescribes that the Treasury Department look at three criteria to determine whether a country should be classified as a currency manipulator. These criteria are (i) a significant bilateral trade surplus with the US; (ii) a material current account surplus (above 3% of GDP); and (iii) engagement in persistent one-sided intervention in the foreign exchange market.

China meets only the first criterion. As for the third, while China clearly intervenes heavily in the currency market, since 2014 this has been mainly to support the yuan. In other words, China has been manipulating its currency to the advantage, not the detriment, of the US.

Six major trading partners were included in a monitoring list because of meeting at least one of the criteria: Germany, Japan, Korea, Switzerland, Taiwan (which met two criteria each) and China (which met only one). Among this list of offenders, China seems to be the least serious according to congressional criteria.

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