China: Trump, Fed, and the Yuan

Published on February 3, 2017

Key Takeaways

Chinese officials believe the Trump administration is pursuing a “not too strong” dollar policy, and expect that rhetoric to help keep the RMB stable through the first five months of 2017 – so long as Washington does not embrace an overt “weak dollar” policy.

A stable RMB is also predicated on expectations of at least a 6.7% Q1 GDP growth rate in China, as well as on expectations of two, rather than three, rate hikes in 2017 from the US Federal Reserve, or, at a minimum, no Fed hikes until June.

February 3, 2017 

Over the past few days President Donald Trump himself has joined a chorus of newly appointed administration officials in blaming Japan, Germany, and China for manipulating their currencies in order to obtain an unfair advantage in global trade.

*** Officials from China’s powerful Central Finance Leading Group interpret these and other back channel signals from Washington to mean Trump and his administration are not advocating a strong dollar, but rather a “not too strong dollar.” Officials from the People’s Bank of China (PBoC) believe the RMB will remain largely stable against the USD or even appreciate slightly over the first five months of this year. ***

*** This assessment is based on endogenous as well as exogenous factors, namely, an expectation that China’s GDP growth rate will remain at 6.7% or even higher through Q1 2017, and that the US Federal Reserve is unlikely to hike rates before June, and will hike only two times this year. ***

Beijing is not certain whether the Trump administration comments on the dollar are signaling an outright “weak dollar” policy. But they caution that it would lead to global market turbulence were it to be the case.

Stable Growth, Benign Fed

When it comes to the Chinese Renminbi, officials note that since the adoption of a series of new measures to curb capital outflows, the foreign exchange selling momentum and capital outflows have gradually come under control. Helped also in part by a broad correction in the overall post Trump dollar rally, they note the offshore RMB has strengthened by a bit over 2% in January.

That stabilization has been supported by data on the domestic economy. They see January’s PMI number as further signs of stabilization of growth, supported by supply-side structural reform and positive changes in economic dynamics, and heading toward a “higher quality growth pattern.”

Officials in the State Council believe supply-side reforms have lifted market confidence and expectations, and maintain the government has been successful in turning domestic consumption and the service industry into key drivers of economic growth. Even the hard hit traditional sectors of the economy, such as coal and steel, are finally witnessing some growth momentum.

And even though the National Bureau of Statistics will not release any more major economic data for January, officials note the indicators last month showed China’s economy maintained good momentum from December of last year into 2017. If this momentum continues, they expect year on year GDP growth to remain at least at 6.7% for the first quarter of 2017.

When it comes to the US dollar, rates, and their impact on the RMB, the internal assessment in Beijing is that, despite expectations that US inflation will be spurred by Trump’s promises on deregulation, infrastructure spending, tax cuts, and a renegotiation of trade deals, the higher probability is that Fed will not hike rates three times this year.

They expect continued uncertainty will surround Trump’s fiscal and trade policies, which will impact the Fed’s outlook and assessment. Chinese officials are assuming that as things stand, the Fed will hike rates twice this year, and will hold off on its next rate move until June.

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