US election itself is a mixed blessing for China – BBH

Research Team at BBH, suggests that there have been several developments in China that may have been overshadowed by the US election and the US election itself is a mixed blessing for China.  

Key Quotes

“Trade and currency issues will likely prove more contentious.  However, to the extent that a Trump Administration may pull back from its global engagement and leadership, there may be less confrontation over human rights and freedom of the press.  

In terms of China's politics, an important development has been the suggestion by some high ranking officials that the age limit on Politburo members as set as it had seemed since former President Zemin first articulated it in 2002.  This is important because next year, the key seven-member Standing Committee begins a new term.  The "seven up, eight down" principle, which means someone 67 years old can be promoted but at the end of their term if they are 68 they must step down, could see five of the seven members replaced (all but President Xi and Premier Li).  

Ahead of next year's National People's Congress, China's legislature, there are various ministerial changes.  Among these, Finance Minister Lou Jiwei has been replaced.  He was widely respected, and no new position for him was announced.  His replacement is Xiao Jie, who previously worked with Premier Li.  Xiao Jie reportedly will focus on three large issues:  relations with the US, broadening local government revenue base, and address the real estate market.  Xiao recommended increasing property taxes before 2013.  This may come back to the fore.  

The US-China bilateral deficit may become more politicized in the period ahead.  Exports to the US fell 5.6% year-over-year in October.  This means that the year-to-date US trade deficit with China, by their reckoning is $208 bln compared with $218 bln in the same 2015 period.  Note that last week's US trade figures showed the US had a $258 bln deficit with China this year, down from $275 bln in the year ago period.  

The yuan has fallen 4.4% this year and is now at its lowest level in six years.  Given the appreciation of the greenback since Asia closed, it seems reasonable to expect dollar rises further on Wednesday.  The currency is likely to be a flashpoint Trump Administration.  As a candidate, Trump has claimed China is a currency market manipulator.  Many expect him to make this an official assessment early in his term.  The Treasury Department, following Congressional legislation, has devised a framework with quantitative measures to better define manipulation.  We have shied away from claims of a currency war, but this too can change.”