china in the shadow of trump in the... · 2020-01-31 · arthur kroeber . squeezings from the...
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April 2017
China In The Shadow Of Trump
Arthur Kroeber
Squeezings from the ‘Citrus Summit’
• Full-on trade war risk now seems small. • Targeted action against individual sectors (steel, aluminum,
household appliances) is likely but macro impact will be modest and China is prepared. • China playing a smart game of keeping cool and offering modest
concessions on agriculture, energy and finance that cost it little and enable Trump to placate key constituencies. • Kushner/Cohn “globalist” faction seems steadily gaining ground
against Bannon/Navarro economic nationalist faction. • Does the Trump team have a coherent economic strategy (either
generally or in regard to China)? It is very hard to discern….
More questions than answers
• Conflicting agendas in Trumpworld: Ø Reduce the trade deficit in general and with China/Mexico in particular
Ø Ramp up investment (but reducing the trade deficit would cut FDI inflows)
Ø Compel US firms to reshore investment (conflicts with fact of globalized production chains and MNC needs to globalize sales; ignores reality that re-shored investment will be technology-heavy and job-light)
Ø Help US firms gain greater market access globally (but how do you sell this to the blue-collar base in the industrial Midwest?)
• Implementation problems: Ø No defined strategy or prioritization
Ø Refusal/inability to staff up key departments
Ø Abandonment of multilateralism weakens US leverage with China
4
Trump lags on appointments
President Confirmed Nominated
Trump 22 21
Obama 54 120
George W Bush 32 65
Clinton 44 69
George HW Bush 27 72
Source: Partner ship For Public Service via Axios
Appointment record of last 5 presidents for 553 executive branch posts requiring Senate confirmation (as of April 6)
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China in the Trump era: More to gain than to lose
• Tactically, China faces obvious downsides from Trump: Ø China is vulnerable to a more protectionist global environment.
Ø A US reflation/strong-dollar trade puts further downward pressure on the RMB and increases incentives for capital outflows.
• Strategically, though, China could come out ahead: Ø With its authoritarian system and lack of financial constraints, China is
better placed to ride out a trade war than the US.
Ø Xi Jinping gets to play the global “adult in the room.”
Ø With TPP dead, China gets to set the terms for Asian regional economic integration, via Belt-and-Road and related programs.
Ø More broadly, Trump’s alienation of allies opens space for China to carve out a sphere of influence.
China economic context: doing just fine, thank you
• China’s economy had a surprisingly strong rebound in 2016, and left to its own devices should continue to do fine in 2017 • The government has a big incentive to support solid growth
ahead of the Oct/Nov 19th Party Congress, despite a slight tightening of monetary policy to ward off asset bubbles • The bottoming of commodity prices (and their subsequent rise)
ended deflation and led to a rebound in corporate profits • Property sales and construction growth will remain strongly
positive in 2017—putting a floor under commodity prices • Domestic debt is rising but well-funded, so does not pose near-
term systemic risk • Capital outflows are NOT a problem and the central bank has
plenty of tools left to control them
7
Core forecasts for 2017
GDP growth: Real: 6.5-6.7%, in line with govt target of “around 6.5%” Nominal: Around 10%
Construction starts: 5-7%, about the same as in 2016; enough to support commodity prices
RMB/dollar rate: Stable around 6.8-6.9 so long as trade-weighted dollar doesn’t rally (and we think it won’t)
Key risks: - Difficulty managing property bubble - What happens after the Party Congress?
8
The industrial economy has recovered nicely
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Investment growth has stabilized
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Construction growth will stay positive this year
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Commodity prices won’t rise much more, but downside limited
12
Household incomes should see an uptick
13
Consumption underpinned by affluent households
14
Exports have been recovering modestly…
15
RMB: Stable vs the dollar; a bit more effective depreciation to come
When DXY is strong, USD/CNY weakens to enable a stable trade-weighted rate
When DXY is weak, USD/CNY can strengthen or stay stable
16
Financial risk overstated; credit cycle is well managed
Despite headlines about “massive credit expansion,” growth in the total credit stock actually slowed in January!
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Monetary policy: tightening will only be marginal at best
No evidence of pass-through of PPI to CPI
18
NPLs are worse than banks admit, but the trend has improved
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Look at the liabilities: Funding risk is low
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Net capital outflows: controllable
Reversal in net direct investment flows shows that capital controls on outbound investment are effective.
21
The current account surplus has fallen to 2% of GDP
22
The long run: growth is slowing, but how high can it stay?
23
Transition 1: The housing boom is over
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Transition 2: A need for more efficient resource allocation
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Transition 3: Demographics start to get ugly
26
Positive: longer working lives can offset ‘demographic tax’
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Questions? The answers are here!
China’s Economy:
What Everyone Needs to Know By Arthur R. Kroeber
(Oxford University Press, 2016)
Synopsis, selected source material and
ordering information at:
www.china-economy-book.com
Contact the author:
28
Contact and disclaimer
Thank you!
This presentation was prepared by Arthur R. Kroeber, Head of research
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