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Experts: China to Focus on Domestic Reform, Diplomacy Amid US Trade Crackdown

© AP Photo / Ted S. WarrenChinese and US flags. (File)
Chinese and US flags. (File) - Sputnik International
Several economists from both the Chinese government and commercial lenders have suggested that Beijing will focus on reaching a trade agreement with the US, whilst also taking measures aimed at decreasing China’s exposure to foreign trade.

Kristian Rouz — Chinese government officials say they have prepared several plans aimed at either retaliating or bypassing possible US trade sanctions. This comes as the most recent round of the heightened tensions between the two world's largest economies, and some experts sound the alarm over the frictions possible escalation to a zero-sum game trade standoff.

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However, economic experts say China's multi-pronged response to possible US trade restrictions could end up as either a mutually-beneficial trade compromise or a mutual exchange in mild contingency policies, including measures of domestic monetary and fiscal accommodation.

The head of China's central bank — the People's Bank of China (PBOC) — Yi Gang has introduced yet another cut to the so-called reserve ratio requirements (RRR), a key tool of its macro regulation of China's commercial banks. The move is equivalent to conventional central bank interest rate cuts and has been employed by China before.

READ MORE: China Prepares Emergency Response Plan Amid Trade Showdown With US

The move is also said to boost China's domestic lending by allowing commercial banks to hold less liquidity in their reserves — hence the term. This, in turn, is expected to increase capital inflows into China, and curb capital flight — which could accelerate in the event the US imposes its tariffs.

"Yi Gang has quickly stepped up and firmly gripped the policy wheel," said Frederic Neumann of the Hong Kong branch of HSBC Holdings Plc. "It's a subtle adjustment of the PBOC's policy stance, easing funding costs for banks while only expanding liquidity at the margin."

Yi was appointed as PBOC head only very recently, and has started his term as the nation's central banker with the right policy move, experts note.

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The move also released additional money liquidity — amounting at 1.3 trillion renminbi ($206.6 billion) — into China's domestic market, which allows for potentially quicker business activity at home, as well as higher levels of domestic investment.

This is also commensurate with US President Donald Trump's proposed infrastructure package, a key staple of which is the allocation of $200 billion from the federal budget for infrastructure projects.

"This shows that Yi is a very skilled and seasoned central banker," Shen Jianguang of Mizuho Bank in Hong Kong.

Higher levels of domestic investment typically make up for potential losses in foreign trade, making looser fiscal or monetary policies an effective substitute to trade revenues in export-dependent nations.

Some economists say that mainland China might ramp up the so-called transhipping of its goods in the event the US slaps tariffs against $50-100 billion worth of China's exports.

READ MORE: Trade War: US Plans to Hit Back at China's Crackdown on US Tech Firms

Such a practice involves China exporting its goods to a third-party country — likely those involved in close investment cooperation with Beijing, also known as "yuan diplomacy" — and the subsequent re-export of the products into the US.

Meanwhile, the government in Beijing has reportedly unveiled its own contingency plan aimed at countering US trade restrictions in case such measures are enforced.

China's National Development and Reform Commission (NDRC) said current trade disagreements with the US have a negligible impact in the mainland's economy. NDRC director Yan Pengcheng told reporters Wednesday that his agency has a variety of tools to stave off possible disruptions in China's exports.

Containers are seen at the Yangshan Deep Water Port, part of the Shanghai Free Trade Zone, in Shanghai, China, February 13, 2017 - Sputnik International
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This comes amidst mainland China's persistent dependence on foreign trade, as its exports of consumer goods and other manufactured products make up for the lion's share of China's GDP and budget revenues.

In addition to trade emergency plans, Chinese officials have been weighing another round of currency devaluations — which, if undertaken, would be the first time since 2015 — aimed at supporting the international competitiveness of its exports.

Weaker currencies make national exports cheaper, meaning a weaker renminbi could help China open new markets or boost its trade volumes with its remaining trade partners if the US and its allies proceed to impose tariffs.

However, not all experts are convinced this is a prudent strategy.

"Is it in their interest to devalue yuan? It's probably unwise," Kevin Lai of Daiwa Capital Markets Hong Kong Ltd. said. "If they use devaluation as a weapon, it could hurt China more than the US. Currency stability has helped to create macro stability. If that's gone, it could destabilize markets, and things would look like 2015 again."

Additionally, Beijing has touted potential tariffs on another $957 million worth of imports from the US — this time, targeting sorghum. China's proposed sorghum imports would be as high as 178.6 percent.

Whilst Chinese customers could cancel their sorghum contracts with US producers, limitations on the imports of agricultural goods could spur food inflation in the densely populated country.

"Market participants might translate the temporary deposit of sorghum as the start of a new round of trade disputes between China and the US, triggering concerns over soybeans," Monica Tu of Shanghai JC Intelligence said.

Despite the belligerent rhetoric, none of the trade restrictions have been enacted yet, and Beijing and Washington continue consultations on a possible agreement to cut the imbalances in bilateral trade.

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