China: Several factors could limit Trump’s intentions - Danske Bank

According to analysts from Danske Bank it might be fear that punishing China could be one of the main aims of Donald Trump, taking into account what he said during the campaign but there are factors that could limit Trump’s intentions. Also, the president-elect has shown a more moderate tone during his victory speech. 

Key Quotes: 

“Immigration, China and arrogance in the political establishment were at the center of Donald Trump’s campaign to become the US president. One might thus fear that punishing China could be one of the main aims of Trump’s policy in the White House. A rise in protectionism could hurt Chinese exports, as the US is the destination of close to 20% of Chinese exports. However, there will be some mitigating factors.”

“First, a fiscal boost to US growth seems increasingly likely. More US growth would benefit demand from China.”

“Second, while an increase in tariffs on imports is likely, Trump has to be careful how much he goes down the protectionist path. China would be likely to retaliate in such a scenario and US importers from China would be hurt by higher duties on imports.”

“Third, China can let the market weaken the CNY further by simply not intervening to dampen the depreciation of CNY. As this kind of depreciation would be driven by markets rather than due to intervention, it would be hard to get global support for calling China a currency manipulator.”

“Fourth, China has significant leverage to the US in the USD1.2trn portfolio of US treasury securities it holds following many years of accumulation (for comparison, the Fed holds USD2.3trn of US treasuries). Should China choose to sell out of this portfolio in a rapid fashion, it could push up US yields significantly.”

“Finally, China holds a trump card in the near-monopoly of rare earth minerals, with an estimated 95% of rare earth mining.”

“The currency movements overnight in USD/CNY very much reflected the development in the broad USD index. The CNY strengthened versus the USD initially, as the USD saw broad-based weakness. However, the CNY has weakened again as the USD gained pace over the day. We do not see any scope for changing our CNY forecast and will await more information on Trump’s policies before we make any changes to our view. However, if anything, the election of Trump supports the case for more weakening of the CNY and we continue to recommend hedging receivables in CNY. We also still see a short CNH trade as a good hedge against financial risks in China.”

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