Market watchers held their breath this week after President-elect Donald Trump kicked off proceedings with a characteristically undiplomatic Twitter outburst against Beijing.
On Sunday 4 December 2016, he told his 16.6 million global followers that he would not let China dictate who he should and should not talk to, adding that China did not consult with the US before devaluing its currency – making it harder for US firms to compete – or taxing US exports to the Asian giant.
The controversial tweets followed China’s official complaint to Washington about Trump’s decision to take a call from the President of Taiwan, Tsai Ing-wen, congratulating him on his election victory.
China considers Taiwan to be a rogue, breakaway state and does not recognise its self-governing status. The US broke diplomatic ties with Taiwan when it officially recognised China’s government in 1979, but the relationship between the US and Taiwan is still close, as enshrined in its Taiwan Relations Act. That said, Trump’s decision to take Ing-wen’s call was considered a major break with diplomatic protocol.
$367bn
The US trade deficit with China in 2015
Early on Monday,
Bloomberg’s Ros Krasney reported that the yuan declined in response to the tweets: "The offshore yuan traded in Hong Kong fell 0.12% to 6.8785 per dollar, taking its decline since Trump’s election to 1.2%."
Market commentators were divided over just how much damage Trump’s comments could do. Malcolm Davis, a senior analyst at the Australian Strategic Policy Institute in Canberra, told Krasney that we could be in for a rocky ride if Trump continues to challenge the One-China policy, which prevents the US from having diplomatic ties with Taiwan, and put pressure on Beijing over trade.
But Sean Callow, a Sydney-based strategist at Westpac Banking Corp, reckoned Trump’s comments would have little impact on the People’s Bank of China’s currency policy. “In time, Trump may realise the limits of the powers of the White House in foreign exchange markets,” he told Krasney.
Bloomberg article
No consequences
A report on Wednesday from
The Wall Street Journal’s Carolyn Cui backed up Callow’s assertions. During the US presidential election campaign, Trump repeatedly threatened to officially label China a currency manipulator but, Cui reported, actually doing so would have no material impact on the country.
Should Trump decide to go down that route, legally, the US Treasury would need to engage with China to urge it to address the cause of the currency devaluation. If nothing changed within a year, a penalty phase would kick in during which the US would take its dispute to the International Monetary Fund and ask the US Overseas Private Investment Corporation (OPIC) to stop doing business with China. However, OPIC has already been banned by the US Congress from doing so – since 1989.
“The end result of this is that being called a currency manipulator has no concrete consequences for China,” Andy Rothman, an investment strategist at Matthews Asia, told Cui.
Wall Street Journal article
Geopolitical risks
Callow told
Bloomberg’s Krasney that what investors are more interested in is whether the US will impose unilateral trade sanctions on China once Trump takes office. He was referring to Trump’s election proposal to slap a 45% tariff on all Chinese exports as retaliation for China’s tax on US imports.
An
Associated Press (AP) article, picked up by
Fox News and a number of other outlets, reported that many believe this tax on US goods, and deliberate devaluation of the yuan, is exacerbating the US trade deficit with China, which rose to $367bn in 2015.
However, alongside sparking a trade war with China, the 45% tariff would hurt lower-income Americans, who buy China’s inexpensive consumer goods, the most. This is the same demographic that voted for Trump in huge numbers. Would the President-elect really want to bite the hand that feeds?
Instead, AP highlighted a number of geopolitical risks that could develop into more serious flashpoints. One is China’s growing claim to the most of the territory covered by the South China Sea. Trump referred to this in his controversial tweets, accusing China of “building a massive military complex in the middle of the South China Sea”.
16.6 million
The number of people that follow Donald Trump's Twitter account
Other risks include the deployment of THAAD (the Terminal High Altitude Area Defense) – an anti-missile system that the US and South Korea say will protect the Korean Peninsula, Japan and the US mainland from a North Korean missile attack. China and Russia say THAAD threatens their own security by giving the US the ability to launch a preemptive first strike. North Korea’s nuclear ambitions are another issue, and then there is the question of Taiwan.
Escalation of any of these issues will increase the risk to investors in the region.
They will be hoping that, once in office, Trump will swap Twitter for the official diplomatic channels. That said, politicians’ comments have always moved markets. It’s just that those comments are usually considered and released in a controlled manner – and markets respond in an accordingly controlled fashion. If Trump’s Twitter tirades do continue once he’s in office, as Davis says, we could simply be in for a rockier ride than normal.
Associated Press article (via Fox News)
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