US Trade Deficit With China Not Decreasing
Last week did not bring peace to the global economy. Beijing announced that it was stopping the purchase American soybeans and other agricultural products and devalued the Yuan after the Donald Trump administration threatened to impose duties on almost all of Chinese exports. The United States called China the “currency manipulator,” deepening the split. Amid growing conflict, stock market companies lost tens of billions of dollars in capitalisation. Business activity indices collapsed. Investors wait and go to gold, which has soared in value.
Theoretically, Beijing can answer by dropping part of its US Treasury bonds out of a total of 1.1 trillion dollars. Their price will fall, which will lead to a sharp increase in profitability (or interest rates) and a sharp increase in payments on US loans. And since the yield on treasury bonds serves as a guideline for business and consumer lending, the cost of corporate debt, mortgages and car loans will increase, which will inhibit US economic growth.
But if Beijing starts selling American bonds, it will lower the value of its remaining shares. Experts believe that the best option for Beijing is a controlled depreciation of the Renminbi, which will ease the pressure on the economy without causing an outflow of capital from the country.
There is another limiting factor. The sale of US Treasury bonds will undermine China’s efforts to attract foreign investment into equity and bond markets. There is also the question of whether a waiver of US treasury bills will really hit the United States. The Fed is likely to respond. In a 2012 congressional report, the Department of Defence indicated that the Federal Reserve is “fully capable” of buying US treasury bills that China throws into the market.
In addition, China has few alternative places to store foreign exchange reserves. Gold? But you can’t buy a lot of it at once - Russia and other countries are buying up almost all of their gold mines, a gold rush has begun in the world.
German and Japanese bonds? At best, they give zero returns. The 1.63 per cent yield on the 10-year US government debt looks much better than the 0.59 per cent negative yield on equivalent German bonds, which reached another record low on Wednesday. This means that you still have to pay the German government for the “privilege” of lending. As one of the Chinese representatives said, copying Trump, “all threats are on the table,” including dumping of US Treasuries. But while it is not economically profitable for China, unless, of course, it comes to a direct confrontation. Then politicians intervene.
Trump is unlikely to have achieved anything. Instead of a quick victory, he came across a long-term conflict that holds back US growth and scares the stock market. The trade deficit — the whole point of its trade war — is increasing, not decreasing. The only obvious way out for Trump is to give up and call the retreat a victory, which could very well happen if a trade war threatens his re-election. And farmers, as you know, are one of the most protest layers of the population, and the elections are already next year.
(A graduate of the Department of Economic Geography of the Faculty of Geography of Moscow State University, Stepushova is an international columnist for Pravda.ru)