More trade, less capital outflow: How a Trump Presidency could benefit China

November 10, 2016

HONG KONG - Even if part of Trump’s aggressiveness gets ironed out once he becomes President, there are two main traits that are bound to remain in the economic policies he will be conducting. The first is protectionism and the second more interference in FED affairs, in particular monetary policy.

This is the assessment of economists at Natixis, the Paris-headquartered global asset manager.

 “Protectionism will affect China directly and indirectly,” Natixis says in a Research Note. “The direct effect of protectionism will be that tariffs are very likely to be imposed on Chinese imports, which is of course bad for China.

“The indirect effect is positive, although it goes in two main directions.

“First, the Transpacific Partnership will not be passed through a Republican Congress, which will create additional space for China to sign either regional or bilateral agreements with other Asian economies (e.g. RCEP).

“This is by no means far from reality as China has already taken steps towards a regional trade agreement in the light of the increasing doubts on TPP being approved.

“Second, a more protectionist US even with neighbouring countries, Mexico being the best case in point, will help China improve its economic ties with countries long under strong US influence.

“The increasing share of Chinese exports to emerging economies, and in particular emerging Asia, may well counterbalance the reduction in exports to the US because the share of exports to emerging economies is already nearly double that of the US.”

Natixis says an important point to note is that more interference by a Trump Presidency in monetary policy matters may slow capital outflows from China.

“During the campaign, Trump has often criticised the FED, and in particular Janet Yellen, for being too dovish,” the Note says.

“This could make us think that he intends to increase the speed of FED tapering.

“However, Trump has also stated that his problem with Yellen is that she has been supporting Obama and, thus, Hillary Clinton, by keeping extremely lax monetary conditions - and that he would replace her if he were to become President.

“While we believe that Trump may not take that decision before Yellen’s term comes to an end in 2018, it seems clear that he will push for lax monetary conditions to support growth.

“This means that, either immediately (if Yellen were to be replaced) or at least within a two- year horizon, investors will need to entertain the idea of looser monetary conditions than expected before Trump’s victory, and thereby a weaker USD.

“This should be music for China’s ears, which has been suffering from massive capital outflows for two years already.

In a nutshell, and abstracting from a much higher geopolitical risk for China which could actually overrule any positive economic impact, the reality is that, economically speaking, Trump might not be such a horrible news for China after all.  www.natixis.com (ATI).