Consultancy says real shock for Asia would be a bigger fall in Chinese yuan
U.S. president-elect Donald Trump's proposals to slap punitive tariffs on China have raised the specter of a trade war between the two largest economies in the world, but analysts at Deloitte have ruled out such a scenario.
Scheduled to be sworn into office on Jan. 20, Trump has already labelled China as a currency manipulator and vowed to impose a tariff of up to 45% on Chinese imports. However, some say there are limited grounds to worry about the impact of his initial campaign rhetoric on trade prospects in Asia.
"The U.S. understands that it cannot bully China like it does Mexico. Considering potential tit-for-tat actions, I think both sides will be relatively restrained," Sitao Xu, Deloitte's chief China economist, told the Nikkei Asian Review ahead of the consultancy's official launch of its first Voice of Asia Report on Monday.
"Our central scenario in 2017 is that there will be trade friction, not a full-blown trade war," said Xu, adding that the U.S. is likely to step up trade restrictions on targeted sectors in which China is active, such as steel and aluminum.
Some have a dimmer view. Shen Jianguang, chief economist at Mizuho Securities Asia, said in a Jan. 13 research note that the "looming threat" of U.S. protectionist trade policies would make China's export outlook "highly uncertain" in 2017. The latest Chinese data in December showed that export growth contracted once again, narrowing the country's trade surplus to its lowest level since March.
Currency a bigger concern
But for Deloitte, the real destabilizer for Asia will be a bigger fall of the Chinese currency rather than headwinds in trade. China is still juggling the internal challenges of cutting overcapacity and the country's quest for growth might prompt the authorities to opt for competitive devaluation of the yuan to boost exports.
The consultancy's view is that given the Chinese central bank's tightening of capital outflows, the yuan should not fall more than 5-7% against the greenback, or at an exchange rate of 7.2 to 7.3 yuan to every U.S. dollar, this year. But a bigger-than-expected yuan depreciation of, say, 10% would have a "disruptive" impact on the region, causing Asian currencies to fall and exporters of manufactured goods such as South Korea, Taiwan and Malaysia to suffer.
Despite some potential shock, Xu says emerging Asia is generally prepared for currency risks as most economies enjoy a current account surplus. "Nonetheless, this is a wild card to be watched in 2017," he added.
China's depleting foreign currency reserves have also warranted concerns. The stockpile is currently about $3 trillion, a significant contraction from its peak of nearly $4 trillion in 2014. Authorities have been drawing from the reserve in a bid to stabilize the yuan's exchange rate as capital fled the country amid a slowing Chinese economy and anticipation of more U.S. interest rate hikes.
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