China, US urged to ease trade war tensions that are ‘weighing on’ global commerce, says IMF chief economist

Frank Tang

The International Monetary Fund on Friday renewed its call for China and the United States to ease trade tension to reduce the already substantial downside risks their dispute poses for the global economy, one day after the two countries agreed to resume face-to-face negotiations next month.

“Trade tension and trade disagreement are certainly weighing on trade,” Gita Gopinath, the International Monetary Fund’s (IMF) chief economist said in Beijing on Friday.

“If you look at the US, China and emerging Asia, there has been weakness in trade across the board.”

The warning came as Gopinath’s team is preparing the IMF’s latest economic forecasts for 2019. In previous projections in July, the IMF revised down China’s growth projection by 0.1 percentage points to 6.2 per cent and global growth by 0.1 percentage points to 3.2 per cent.

Trade tension and trade disagreement are certainly weighing on trade. If you look at the US, China and emerging Asia, there has been weakness in trade across the board

Gita Gopinath

Despite market worries that the risks of a global recession are rising, Gopinath said that the current China-US tensions are mainly hitting merchandise trade, although the services sector is still holding up well.

The IMF economist highlighted that higher bilateral tariffs are unlikely to reduce aggregate trade imbalances, a long-standing viewpoint of the Washington-based fund.

She also defended the need for exchange rate flexibility and market-driven volatility, adding that a weaker currency would produce a limited boost to exports in the short term.

Gopinath reiterated the IMF’s recent evaluation that the weaker yuan exchange rate remained in line with China’s economic fundamentals in 2018, in contrast to the US assessment that China had deliberately let its currency weaken to gain competitive advantage.

The US dollar-yuan exchange rates is a new battle field between the world’s two largest economies, after their tit-for-tat tariff retaliation escalated since the end of July to cover the vast majority of bilateral trade.

The US Treasury announced a month ago that it had officially labelled China a currency manipulator, soon after the yuan fell below the psychological mark of 7 to the US dollar, a level that the Chinese central bank had previously defended. Beijing denied the charge, instead attributing the yuan’s decline to the market reactions to US President Donald Trump’s threat to increase American tariffs starting in September and reiterating its commitment not to engage in a currency devaluation to gain a competitive advantage.

Huang Yiping, deputy dean of Peking University’s national school of development, said China had not conducted direct intervention in the foreign exchange market since 2017, with the management of the currency through the daily fixing and trading band intended to prevent excess market volatility from threatening financial stability.

Huang, a former adviser to the People’s Bank of China (PBOC), said he would not recommend that Beijing depreciate the yuan to offset the economic effects from the trade war.

“Given the economy is more open, there’s another issue. Our study showed that in China the impact through the finance channel overweighed [the impact through] the trade channel,” he added.

The yuan’s value against the US dollar has continued to fall after a 3.8 per cent drop in August. The US dollar-yuan midpoint rate was set by the PBOC at 7.0855 on Friday, while the onshore exchange rate closed at 7.12.

Given the economy is more open, there’s another issue. Our study showed that in China the impact through the finance channel overweighed [the impact through] the trade channe

Huang Yiping

Zhou Hao, senior emerging markets economist at Commerzbank, said the central bank has added a substantial “countercyclical factor” into the calculation of its daily yuan fixing, which stayed around the 7.08 level for more than one week, implying a new “red line” for US dollar-yuan market exchange rate at around 7.20.

“Obviously, the PBOC wants to slow the yuan’s depreciation pace. As we have argued before, a gradual and manageable currency depreciation is in the best interests of Chinese policymakers,” he said.

Top Chinese and the US trade negotiators are expected to resume face-to-face trade talks in Washington early next month, the first in more than two months. Deputy-level meetings will start from mid-September to work out details for the October meeting, a spokesman for China’s Commerce Ministry confirmed on Thursday.

Shaun Roache, chief Asia-Pacific economist of S&P Global Ratings, said China has policy space in the short term to deal with the “Great Game”, its term to define the trade and technology tensions with the US.

But he called for China to commit to structural reforms and economic openness, rather than rely on traditional economic stimulus.

“We think a deal can be done. The US is willing to make a deal. But [both countries] need to make some compromises and they are not going to get whatever they want,” Roache said on Thursday.

“The faster China reforms at home, the greater the chance [to get] a deal,” he added.

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