China’s Teflon Tariff Tiffs
As China and the US continued their cycle of equal tariff retaliation on agricultural and industrial goods and threatened tighter investment rules, Beijing accused Washington of self-inflicted wounds, with exports now half their GDP portion of a decade ago at 20% as the tougher Trump administration stance was described as a global trade system danger. Initially $50 billion was at stake for thousands of Chinese products, but analysts dismissed the cost with calculations that an across the board charge on all American shipments would dent growth less than half a percent. The bilateral trade surplus continues to increase in nominal terms at $55 billion for January-February even with 3% renimbi appreciation against the dollar, but a proposed non-tariff crackdown on so-called “Made in China 2025” high-tech reach has drawn intense business and diplomatic focus. The confrontation looms as reputed anti-China hawks Pompeo and Bolton were appointed to top foreign policy posts, and the BIS issued a “code red” warning of banking stress largely overlooked during the spat. The Beige Book lauded “strikingly consistent” Q1 economic results with reservations about commodities and property, as the official PMI topped 51 in March and retail sales and fixed investment were up almost 10%. Consumer inflation was 3% on higher food prices as the producer reading retreated to under 4%. While Washington relations withered Australia inked an expanded currency swap line and local bonds were added to the benchmark Barclays Global Index at a 5.5% weighting as of next year, which could eventually spur $250 billion in inflows, according to estimates. February international reserves were steady at $3 trillion, one-third in US Treasuries, as rumors flew that these holdings could feature in future beyond-trade reprisals.
At the People’s Congress the economic and financial affairs group was upgraded to a commission and new top advisors and regulators were appointed to “work decisively” for risk control. The deputy central bank governor, educated in the US, assumed the helm and will implement President Xi’s restructuring incorporating insurance industry oversight under stronger Communist Party guidance. The securities body will stay separate, as the communiqué urged faster local government and state enterprise deleveraging. Household debt may also be in the 25% of GDP range from single digits a decade ago if peer-to-peer lending not captured in statistics is included. Shadow banking will be subject to harsher disclosure and capital adequacy treatment to “eliminate arbitrage” and an authorized digital currency will be developed. The repo rate was hiked as big banks reported improved profits with second-tier competitor flight. Credit rose 12% last year, with mortgage value at double that pace. The IMF’s Financial Stability Board found that China represented 15% of the world’s $7 trillion non-bank loans for “systemic risk.” Overseas conglomerate Anbang received RMB 60 billion from a public rescue fund to protect insurance policyholders and bank exposure as its former chair faces criminal charges and stakes are sold off. Tech bellwethers like Alibaba are under prodding to list at home and repatriate funds under a new China Depository Receipt program, as the Finance Ministry charted a 10% state company debt jump to $17 trillion in February. Property developers continue to clog the offshore and onshore issuance pipeline as a national tax will be debated in parliament again unlikely to stick.
