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Much ink has been spilt in the last few months, as China-watchers reflect on what the new Trump administration will mean for the future of the Sino-American relationship. Talk is cheap, and Trump has plenty of it – threatening to impose high-tariffs on Chinese imports is among his most protectionist sabre-rattlings.
Xi Jinping has taken the opportunity to praise globalization, free trade, openness and unity at many occasions in the last few months, seeking a new China-centric globalization epoch in the US-shaped economic vacuum. Trump and Xi made headlines (and tweets) when they met for the first time in Mar-a-Lago this month. Trump tweeted “goodwill and friendship was formed, but only time will tell on trade.”
However, pay too much attention to the rhetoric and twittersphere, and miss the real story. Here are five graphs which push-aside the speech-making and show us their real intentions.
1) China’s US Treasury holdings have dropped dramatically
China is one of the world’s keenest acquirers of US Treasury debt, dwarfing all other nations aside Japan. Present in the data are reactions to the weakening and strengthening of the yuan going back to 2013. As the yuan weakens in 2016 the Chinese US treasury position dramatically decreases after a long period of stability. Is this another reaction to the forex market, or to Trump’s impending administration?
2) Trumped down treasuries?
Taking a closer look at the data, China begun reducing their US Treasury position mid-2016 – long before Trump was sworn in, while Hilary Clinton was still the clear favourite to win the election, and while both candidates were still campaigning over the summer.
However, with the threat of uncertainty in the US and a dramatic drop of about US$200 billion in six months, an initial reaction to the forex was likely spurred on by political risk.
As to how China may be repositioning itself, Chinese outbound M&A activity saw a surge of activity as total outbound deal volume reached US$206.6 billion (372 deals) in 2016. This is an increase of 118.7% compared to 2015, overtaking all annual values and deal counts on record.
This comes as part of China’s Belt and Road initiative, China’s project of investing into key infrastructure projects in countries along the old silk road and maritime route, including related initiatives such as the China-Pakistan Economic Corridor. For a recent example, the EU Commission recently approved ChemChina’s eye-watering US$43 billion acquisition of agrochemical and seeds group Syngenta.
3) China’s foreign reserves still teeter nervously at US$3 trillion
The exact make-up of China’s foreign reserves is a state secret. Analysts estimate that about two-thirds are accounted for by the greenback. China is currently struggling to keep their foreign reserves above the US$3 trillion mark; the reserve has flirted either side of this mark several times since the start of the year.
The pressure on foreign reserves has caused China to stem capital outflow with a series of cross-border currency measures with fairly draconian consequences for ordinary Chinese citizens found in violation of the cross-border currency rules. China’s plan to internationalize the renminbi has had to be put on the back-burner.
4) US trade deficit is still growing
“The meeting next week with China will be a very difficult one in that we can no longer have massive trade deficits and job losses. American companies must be prepared to look at other alternatives,” Trump tweeted on March 30, making reference to the then up-coming Mar-a-Lago meeting.
Whilst it is true that the US’s trade deficit with China has steadily grown, has China caused job losses?
5) Who’s taking whose jobs? China now invests more into US than US does into China
Since 2001, the US has invested billions of dollars into China, on what was a mostly one way street. However, China – for the first time – invested more into the US in 2015 than the US did in China. Earlier this year Alibaba’s executive chairman Jack Ma created a buzz when he discussed with President Trump the creation of 1 million jobs for Americans over a five-year period.
So, what happens if Trump – in an ironically command economy style of leadership – cajoles US firms to stop buying Chinese and only invest in the US? China relies on exports to the US, but the still sizeable position on US Treasury debt and substantial FDI flow into the US means that the damage could cut both ways.
China is well aware of how co-dependent the two economies are, and pushed on by a mix of the strengthening dollar, weakening yuan, and rising US risk, is repositioning itself accordingly: away from US Treasuries and towards ownership of foreign infrastructure in Asia, Europe, Africa, and the Middle East, as per the Belt Road initiative. A move indicative of a steady, but certain, economic repositioning. Perhaps Xi was right when he said in Davos, “there are no winners in a trade war”. But if there are, it might just be China.
19 Apr 2017