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President Trump & the China and Global Impact

The world watched stunned as Trump seized victory from Clinton in one of the most dramatic campaigns and defeats in modern American politics. The final election results: Trump 290 Electoral votes to Clinton’s 228.  

America is racing to figure out what this means domestically. Across the globe, we are all puzzled on the potential effects of a Trump foreign policy. In China, the big question is:  What will the China-US relationship look like under the administration of President Trump?

In the Here & Now

Financial markets are taking a hit. Wall Street and stock markets across the globe bet on a Clinton administration. They were wrong. On election day, as it became clearer that Trump would win, market volatility began to occur- the dollar index fell substantially, precious metals rose sharply and market shares took a nose dive. Economic growth and policy uncertainty will fuel further price rises in oil, energy and other commodities in the weeks to come.

The election results will also have an important impact on short-term monetary policy. Pre-election, with a Clinton-assumed win, the Fed would have probably raised the interest rates in December. Now, that will not happen.

The foreign exchange market will be polarized. The dollar panic began on Election Day and is set to continue- resulting in the rise of the Yen, Swiss franc, Euro, as well as other European currencies. On the other hand, emerging market Asian currencies will most likely depreciate as the dollar falls. Some may even depreciate further than the dollar.

Pre-election, China’s capital flow situation was already quite serious. This was also coupled with a decline in foreign currency reserves and an exchange rate down to about 6.8. Now, the pressure to reduce capital outflow will increase. However, even if China’s Central Bank allows the RMB to further depreciate, the exchange rate will be maintained between 6.9-6.7 against the dollar.

In terms of US dollar asset, US long-term treasury bonds are safe haven assets. Short-term treasury bonds, however, will come under pressure.

Generally, in the here and now, there will not be a significant influence on the global economy. Trump’s inauguration will take place on January 20, 2017. We are all waiting to see what will be Trump’s foreign policy and how the new Congress, Supreme Court and Presidential Cabinet will shape global relationships.

What’s to Come

In the long-term, a Trump administration may have negative impacts on China’s economy. However, China will rebalance its relationship and show resilience.

The question on everyone’s mind:  Will President Trump follow the controversial rhetoric and policies of candidate Trump? With no political record, the answer is: No one knows.

In terms of picturing a Trump administration, an educated guess is that his first priority will be re-election. During his campaign, Trump relied on anti-establishment politics and controversy to blaze a trail. In order to secure a second term, he needs to keep his unique brand of politics and policies.

He is most expected to focus on domestic economic policies- building up America’s infrastructure, securing America’s oil and energy future, slashing taxes and a “repeal and replace” Obamacare policy. His economic take seems to be embedded in realism and “a winner take all” mindset.

From a Chinese economic perspective, Trump’s protectionist policies will have a negative impact on the medium to long-term. However, China will rebalance to counteract those impacts. In terms of China’s rebalancing, China will most likely implement a two-prong strategy:  (1) strengthen multi-lateral cooperation through negotiations to resolve trade disputes in the WTO and (2) weaken the reliance on US trade and drive domestic demand. Particularly in terms of the second strategy, China has already had an overarching aim to drive domestic growth, so any negative impact from US protectionism will be counteracted.

From a global perspective, the Trump administration will have the greatest negative impact on small to medium-sized economies that highly depend on the US market for growth. Yet, it is worth noting that economies rebalance. If these countries are negatively impacted, their trade will shift to other robust countries. Generally, that shift will give China the advantage.

Conclusion

It is still too premature to talk specific policies of the Trump administrative. However, the impact the administration will have is a foregone conclusion.  China and the global economy must fully safe guard against potential risks and uncertainty. Yet, perhaps we should not be too pessimistic. Trump is, after all, a realist and a businessman. His policies may be a mixture of ideology and grounded in reality. While, on one hand, he claims that China is stealing American jobs. On the other hand, he praises the capability and ambition of the Chinese.

Only time will tell what will truly happen. Like everyone else, we can only wait and see.