Here’s more proof the Chinese government is worried about entering a trade war with the United States.
The country’s central bank said Sunday that it will release about 700 billion yuan — roughly $107 billion USD — into its financial system in an effort to encourage banks to lend more cash to businesses and spark new economic activity in China.
The move takes effect Thursday, or a day before China and the U.S. are scheduled to impose significant tariffs on some of the other country’s most popular exports.
The cash will be freed up by China reducing the amount of money commercial banks are required to hold from deposits. While it’s coming on the eve of the tariffs being imposed, it’s also the third time this year such a reduction has taken place as China tries to avoid a significant economic slowdown.
It’s also a larger reduction than what investors had anticipated.
“The intensity of the move exceeded market expectations,” Wang Jun, Beijing-based chief economist at Zhongyuan Bank, told CNBC. “This move will help support the real economy and stabilize financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market.”
China’s economic growth was projected to slow roughly half a percent from last year’s 6.9 level of growth just because of factors such as rising borrowing costs, regulatory limits on air pollution and a reduction in spending by local governments.
A larger and more prolonged trade war with the U.S. would likely accelerate that reduction.
The value of China’s yuan reached a five-month low compared to the U.S. dollar on Friday. The country’s stock market recently hit two-year lows as fears of the trade war loomed. China’s government also has a growing debt problem.
“We believe the Chinese economy has yet to bottom out, and the situation could worsen before getting better,” according to a forecast by analysts at investment bank Nomura obtained by CNN.
China’s exports to the United States represented roughly 3 percent of China’s gross domestic product in 2017. Zhu Haibin, chief China economist of JP Morgan, told FinanceBrokerage.com that U.S. tariffs on Chinese exports could cut up to half a percentage point off economic growth.
Another important factor: China has a significant trade imbalance of its own to worry about.
The Chinese Foreign Trade Degree of Dependence was 33.6 percent last year. That’s significantly higher than the 12 percent ratio of the U.S.
“That means China’s FTD is almost three times of the United States. So you can judge who will win, who will lose,” Xia Yelian a libertarian scholar and former economics professor at Peking University, told FinanceBrokerage.com.
Which is why President Donald Trump has leverage in his dealings with China. The U.S. economy is at its strongest level in years. China’s economy may be growing at a higher rate than that of the U.S., but the signs of a slowdown are becoming more pronounced.
Any prolonged slowdown over trade matters could prove a threat to Chinese president Xi Jinping. He doesn’t have to worry about simply being voted out of office — he’d have to worry about putting out an insurrection by Chinese citizens.
While a trade war would hurt the U.S., it could significantly damage China’s economy. Trump knows this, which is why he’s wanted to take up this fight with China since before he even began his presidential campaign.
It will take tough negotiations to win this battle. And when it comes to tough negotiations, who wouldn’t want Trump on their side?
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