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Feb 27, 2017 12:25 PM ET

Challenges Facing the Chinese President

Challenges Facing the Chinese President

iCrowd Newswire - Feb 27, 2017

By Dr. Abdullah Shibli
Feb 26 2017 (The Daily Star, Bangladesh)

China’s President Xi Jinping has been walking a very delicate tightrope since the inauguration of the new President of the USA who has threatened to launch an economic war with China. One of candidate Donald Trump’s promises to his nation was to declare China as a currency manipulator on day one of taking his oath of office. Fortunately for China, President Trump is busy with other more pressing problems and has missed his self-imposed deadline by more than a month already. It is a fair guess that President Xi Jinping is counting days before his US counterpart will succumb to the calls by Democrats to implement one of his campaign promises and declare China a currency manipulator. The top Democrat in the Senate, Chuck Schumer, called out to President Trump, “Mr. President: if you really want to put America first, label China a currency manipulator.”

Image: seekingalpha

Image: seekingalpha

Obviously, China is not eagerly looking forward to such an outcome, even though the measure is known to be popular with Trump’s electorate. But would being labelled a “currency manipulator” hurt China or even be a legitimate one? Let us consider the yardstick against which China’s policies would be held accountable. A legislation passed in 1988 authorises US secretary of the Treasury to “analyse on an annual basis the exchange rate policies of foreign countries … and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”

Empowered by this legislation, every six months, the Treasury department puts countries in a blacklist known as “Monitoring List” on the basis of three tests:

* The country must have a significant trade surplus with the US.

* The country has a “material” current account surplus.

* The country is engaged in persistent one-sided intervention in the foreign exchange market.

In the past, China has met at least two of these criteria and has been on the “list” on and off since 1994. China’s image in the US took a hit on the chin when Donald Trump declared his candidacy for the president’s position in 2015. On November 9, 2015, Donald Trump wrote in the Wall Street Journal’s opinion page a harsh critique of China’s currency practices. The article, “Ending China’s Currency Manipulation”, Trump did not mince words when he proclaimed that “China’s de facto tariff on imported goods has cost the US billions of dollars and millions of jobs.” Rightly or wrongly, he has kept up this barrage of attacks on China’s economic policy throughout 2016, regardless of the evidence that China had moved away from deliberately undervaluing the yuan.

As a matter of fact, the yuan’s value against the dollar has been declining since 2014 and it is at a six-year low. China, either to prevent yuan from sliding further or to forestall any accusation from US that the devaluation is a result of covert government manipulation and hurting US exports anyway, has spent more than USD 1.3 trillion of its reserves to buy its currency to shore up its value. In other words, China is attempting to raise the value of yuan not to cheapen its value in the foreign exchange market. However, in an interview with the Wall Street Journal last month, Trump is not convinced and ridiculed Jinping’s administration’s claim about supporting their currency “because they don’t want us to get angry”.

To compound the situation, Donald Trump has been continuously saber-rattling, off and on since winning the elections. In mid-December he said on Fox News that “We’re being hurt very badly by China with devaluation; with taxing us heavy at the borders when we don’t tax them; with building a massive fortress in the middle of the South China Sea, which they shouldn’t be doing; and, frankly, with not helping us at all with North Korea.”

He now appears to be leaning towards a multi-pronged attack, along the economic front as well as in the geopolitical sphere. While it is not clear which economic measures the new Administration will finally take, the outline is pretty clear. The US wants China to step away from flooding the US market with cheap Chinese goods while keeping out US exports, thus causing US to run a trade deficit with China to the tune of USD 300 billion annually. More directly, President Trump has been singling out US companies that have outsourced their manufacturing to China and taken away jobs from US workers. He has also been threatening China with a 45 percent tariff on Chinese exports, similar to the 20 percent tax on Mexican imports to pay for the border wall. China and other countries are not powerless, though, against these threats since any form of tax on imports could be challenged in international courts as violation of WTO rules.

China could face other types of sanctions too. It has been reported that President Xi Jinping’s counterpart in the White House is exploring a new plan under which “the US Commerce Secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China”, allowing US companies to bring anti-subsidy actions themselves to the US Commerce Department against China or other countries.

All this uncertainty is throwing the Chinese leadership in turmoil since these challenges are coming on the eve of China’s 19th National Congress scheduled for next autumn. 2017 is a big year for the Communist Party of China and its President. “The Chinese leadership will likely face significant political uncertainty both internally and externally, and in response they will likely place social and economic stability as a top priority throughout 2017,” a Credit Suisse research team led by Vincent Chan wrote in a note.

President Xi Jinping, however, is not a pushover. Aware of the danger that Donald Trump faces if he carries his anti-China stance too far, Trump spoke with the Chinese president on the phone and reaffirmed US commitment to “One China” policy, which recognises Beijing’s sovereignty over Taiwan. Trump’s action to cancel TPP was also seen as a positive signal by China. And, Xi Jinping holds the ultimate trump card: China has more than USD 1 trillion in US bonds, notes and bills and Mr. Trump is aware that any move by China to sell these will cause major disturbances in US financial markets.

The writer is an economist and author of several books on economics.

This story was originally published by The Daily Star, Bangladesh


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