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AB 2000 studies

Alain Boublil Blog


China-U.S. : after the trade war, the monetary war?

The next G 20 Summit which will be held in Osaka at the end of this month will retain attention more from the expected encounter between Donald Trump and Xi Jinping than from the meetings organized between the leaders of the major world economies. This institution, created at the middle of the Twenties had as a purpose to manage the international economic issues through a multilateral approach over passing the G7 framework, which was limited to the wealthiest countries, through its extension to emerging countries. This time, it is really a bilateral approach which will prevail, even if everything will be done for the sake of appearances. But the press release which will result from these discussions has very few chances to offset the results or the lack of results coming from the face-to-face meeting between the American and Chinese leaders.

For a year, the U.S. are trying to rebalance their heavily trade deficits with China through the adoption of protectionist measures. It started with the institution of a 10% customs tariffs on 200 billion dollars imports, the rate having been increased later to 25%, until the interdiction for American companies to trade with Huawei, the Chinese leading telecom company. These decisions have always been receipted with worry because they could generate a slowing of the world growth. Through hurting China, which constitutes an essential factor of this growth, every country could be affected by its consequences. The White House objective was also to incite American companies to relocate productions and to create jobs inside the country. It has not been fulfilled but the country has, despite of that, kept a high growth rhythm and had reduced unemployment without generating an inflationary spiral. Compared to European achievements, Donald Trump ones are rosy and incite the leaders of several countries to quote them as an example. In fact, they are not the consequence of his protectionist policy but rather of his strategy based on an increase of American budget deficit. That has not impeached the American president to announce a second wave of customs tariffs, related, this time to 300 billion dollars imports from China. The decision will be or will not be put in application according to the results of his meeting with his Chinese counterpart, during the G20 Summit.

If, at last, it was decided, such a measure would have heavier consequences in the U.S. than in China. The Federal Reserve has estimated that it would cost to each household around 800 dollars every year. The leaders of 600 major companies have written to Donald Trump to put him on his guard. Another custom rights increase would hurt the American economy because the enterprises would not have any other option than to transfer their cost to their customers. The most important importers are not industrial companies but major retailers which get their supplies from China for a long time because it doesn’t exist inside the country competitive suppliers. At a lower extent, manufacturers have also organized their supply chains through sub-contracting the making of components or spare pieces in the Middle Empire. They are not going overnight to produce them at home. Until now, they haven’t yet studied this eventuality. Investments would be costly and nobody believes that such a policy could be maintained on the long term.

The trade war initiated by the U.S., even if both leaders find an agreement which would allow them to save their faces and to put temporarily an end to it, has contributed to deteriorate international economic relations. It could be prolonged in the future through a monetary war. The White House has denounced, in contradiction with the analysis of its own Treasury Department, the manipulation by China of its own currency, the Yuan. Beijing would have devaluated it to reply to the instauration of customs duties and maintain the competitiveness of its goods. At the beginning of the year, the dollar had a value of 6.90 Yuan. Then, during the four following months, the Yuan rebounded and remained stable around 6.70. After the tariffs raising on 200 billion Chinese imports announced 2019 May 5th and the threat to tax 300 billion more products, the Chinese currency weakened to slightly overpass 6.90 Yuan for one dollar and regained its level of the start of the year. All the analysts worried about the idea the symbolic 7 Yuan level could be overpassed.

These comments have been contradicted by Beijing which considers that no symbolic value exists regarding the Yuan and whose priority is stability and the pursuit of its policy of internationalization its currency along with the liberalization and the opening of its financial markets. The development of connections with London financial hub since the beginning of the year is spectacular, for instance. Transactions denominated in Yuan have even over passed these between the euro and the pound. But that doesn’t mean that China has no means to weight on the current discussions with the White House. China central bank has accumulated huge foreign reserves. They have reached 3 100 billion dollars. Current accounts surplus of the country are less high than in the past due, for example, to the expenses of Chinese tourists abroad. So foreign reserves increase has slowed for two years but the share of American Treasury Bonds is still very high, with an amount of 1 100 billion dollars. So China is the most important Unites States creditor. At a time when American public deficits are rising rapidly and pressures are high on Federal Reserve to soften its monetary policy, Beijing disposes of a formidable arm.

China central bank is not going obviously to massively sell its dollar denominated assets. Through provoking a fall of the American currency, China would be the first victim since it owns a huge amount of it. But it could much more subtly stop subscribing Treasury Bonds emissions and progressively reduce their share in its reserves. Consequence would be an increase of interest rates paid by the U.S., which could be more worrying since it occurs at a time when public finance needs are increasing. This trend would harm Donald Trump objectives and monetary tensions would be added to trade tensions which, even if an agreement is found during Osaka meetings, will not completely disappear.

Until now, the trade war between Beijing and Washington has had few consequences outside the U.S. An appeasement would be logical because it became more and more obvious that the main victim of these confrontations is the American people and it is requested by the business community. But the surging of monetary tensions could have much vaster consequences. American interest rates hike would be unavoidable to attract necessary financial flows to compensate the withdrawal of Chinese subscriptions. That rate hike would provoke a dollar rebound, and so a depreciation of other currencies and not only the Yuan, which would once more trigger Donald Trump furor. He would accuse related countries to manipulate their currencies, as he did regarding China, to penetrate more easily the American market. In the context of an electoral campaign which will necessarily be intense, these points risk to be seriously considered and that will not contribute to the easing of the international economic relations.   



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