The Trump presidency – China a winner
Rhetoric vs Reality
Donald Trump wants to take on China. The president’s winning campaign promised to impose heavy tariffs on imports of Chinese goods and brand the Asian superpower a currency manipulator. Several analysts subsequently forecast that it would make the Middle Kingdom one of the biggest losers from his presidency. And yet, counterintuitively, this column believes China looks likely to be a winner.
The world has indeed gone topsy-turvy when President Xi Jinping appears on stage at the World Economic Forum defending globalization. The vacuum left by a lack of US leadership is rapidly being filled.
At an economic level, China’s rise is visible in trade and treasuries, as well as the renminbi’s increased importance and enhanced profitability of the country’s banks.
First, the US-led Trans-Pacific Partnership, from which China was excluded, looks dead. Both Trump, and the Republican Party, which dominates both houses of Congress, have expressed opposition to it. As a result, in December, US ally Australia spoke out in support of the Beijing-directed Free Trade Area of the Asia-Pacific (FTAAP) proposal, as well as Beijing-supported regional trade pacts, which exclude the US.
Second, given that a Trump government plans to increase spending while lowering taxes, larger borrowings will be needed. China has been by far the largest foreign owner of US treasuries for several years. This amounted to $1.185 trillion – or over 19% of foreign-owned treasuries – as of August 2016, according to estimates from the Federal Reserve. China’s goodwill is crucial to issuing more debt, although, as usual in these cases, Beijing’s ownership of such a large stock of US government bonds ensures the relationship is one of mutual dependence.
There is a third area, foreign direct investment. Data from 2015 shows Chinese investors bought a record $15 billion worth of companies and real estate in the US, a figure which is set to be doubled in 2016, according to data from the Rhodium Group and the National Committee on US-China relations. Late in 2016, Dalian Wanda, China’s largest real estate company, acquired the US company behind the Golden Globe awards for $1bn. Around 90,000 people are employed by Chinese-affiliated companies across more than 80% of congressional districts – a handy lever for China if relations deteriorate.
Additionally, China could prove an important ally in improving ailing US infrastructure, a $550m Trump promise and one that all parties can agree on. The Chinese are master builders and their experience in Africa – where they have built roads and bridges in exchange for minerals and land – will stand them in good stead. (Your intrepid correspondent recently witnessed this for herself, driving along the asphalt roads of Tigray in Ethiopia, all built by the Chinese.)
The dollar’s status as the primary reserve currency remains. Yet last year over 22% of China’s external trade was settled in RMB, well up from zero in 2010, while HSBC estimates it will shoot up to 50% in 2020.
Among other effects, this will give a funding cost advantage to Chinese banks who had been labouring under the disadvantage of Western banks’ greater access to US dollars for trade, writes research boutique Redburn. The report outlines why Chinese banks look likely to increase their profitability at the expense of their Western counterparts.
China, the great imitator, a country accused of illegally copying Western designs, broke the record for patent applications last year. Granted, there was government pressure on companies to file and not all will stand up to international scrutiny. Still, well over a million patents were filed, more than those in the US, Japan and South Korea combined.
Underestimating China is as foolish as believing pollsters can predict who will win the US presidency…