By Brian Jackson, China Economist, IHS Global Insight
Key Points:
- China will seek support for a China-led free trade area in the Asia-Pacific during a leaders’ summit in Peru on 19-20 November, according to statements by Vice Foreign Minister Li Baodong.
- Li’s comments were in response to questions on rising protectionism and the fate of the Trans-Pacific Partnership (TPP) after the election of Donald Trump.
- China has previously proposed the Free Trade Area of the Asia-Pacific (FTAAP) and Regional Comprehensive Economic Partnership (RCEP). President Xi Jinping will attend a meeting of leaders in the Asia-Pacific Economic Cooperation (APEC) forum in Lima on 19-20 November; vice minister Li stated that Xi’s attendance showed China’s ‘confidence in promoting the FTAAP process’.
Significance:
During the US election campaign and in early transition documents released since, President Elect Trump consistently stated the need for a more protectionist trading stance with China, suggesting the need for double-digit increases in tariff levels.Similarly, the TPP’s ratification is widely doubted based on campaign comments; that draft agreement so far excluded China. Li stated that the rise of protectionism would drag on growth and reform momentum in the region, and stated that other free trade areas should be established ‘as soon as possible’.
While there is considerable market uncertainty about Trump’s intention to follow through on campaign rhetoric, and the extent to which that rhetoric is feasible to implement, uncertainty around issues so material to China’s economy will push Chinese leaders to move more aggressively in its trade negotiations with other major partners. Chinese customs data show its merchandise trade surplus with the US was USD260.9 billion in 2015, accounting for 2.6% of nominal GDP. In the 10 months ending in October 2016 China’s trade surplus with the US had already declined by USD 10.3 billion compared with the same period a year prior due to contracting exports.
PBoC threads needle between USD strength and emerging market weakness
Key Points:
- The People’s Bank of China (PBoC) set the central parity rate at 6.8495, its lowest level since December 2008, reflecting a day-on-day change of 204 basis points or 0.3% depreciation.
- State-run media reported that the yuan had limited room for further weakness in the medium term, although was prone to short-term pressure, and added that large single day movements in the central rate may reflect a strategy of “releasing pressure in advanced” of future events.
- Presumably, this is in view of potential trade friction in the wake of Donald Trump’s presidential victory or international capital market volatility linked with an expected US Federal Reserve rate hike widely expected in December 2016.
Significance:
First, it is notable that recent headlines of the CNY at a 5-year low jumping to 8 years is more a reflection of a Chinese exchange rate policy during 2008-10, when the CNY-USD rate barely budged from a center point of 6.84, rather than an extremely sharp drop on 15 November. Today’s drop in the CNY remains consistent with China’s message of maintaining stability against a basket of currencies, rather than only the USD. While the CNY has depreciated by about 1% against the dollar in the last week, it has only depreciated against the CFETS (China FX Trade System) basket by about 0.2% in the same period.
This reflects that while the CNY depreciated against the US dollar, British pound, and Russian Ruble, it also appreciated against nine other currencies in the basket during the same period, in some cases by more than 2%. Further CNY depreciation is likely to the extent that emerging market currencies continue to be battered by volatility, and thus is likely to continue until the incoming US executive branch and Federal Reserve move to calm markets. Until then, further depreciation will increasingly include some overshooting on China’s part, creating space for a period of extended stability or modest rebound once markets calm.