China Unveils Plan To Combat Trump Tax Reform: “We’ll Have Tough Battles”

Monday, December 11, 2017
By Paul Martin

by Tyler Durden
Dec 11, 2017

With Donald Trump’s historic tax reform on the verge of passage, and with the Fed continuing its rate hiking cycle so far undeterred, and according to the Fed’s own dot plot still having another 7-8 rate hikes to go, China is getting nervous because, as the WSJ reports, it fears “a double whammy sapping money out of China by making the U.S. a more attractive place to invest.” In other words, those capital outflows which China was confident it had finally bottled up, are about to return. And that’s even as the U.S. is taking China to task over trade imbalances, recently rejecting China’s bid for “market economy” status with the WTO.

In response, the WSJ reports that Chinese leadership is preparing a contingency plan to counter consequences for China of U.S. tax changes and the Fed’s expected interest rate increases.

Under the plan, the PBOC will deploy a combination of tools including “higher interest rates, tighter capital controls and more-frequent currency intervention to keep money at home and support the yuan.” Just like the unstable market which can careen, and crash at any one moment without central bank supervision, and which earned the stock market the title of a “Gray Rhino”, which China defined as “highly probable, high-impact threat that people should see coming, but often don’t” the WSJ notes that an official involved in Beijing’s deliberations has also called Washington’s tax plan a “gray rhino,” an obvious danger in China’s economy that shouldn’t be ignored.

“We’ll likely have some tough battles in the first quarter,” the official told the WSJ.

The sense of urgency illustrates Beijing’s challenge in battling policies rolled out under Mr. Trump’s “America First” banner.

At the center of China’s dears is the yuan, which has just regained its footing after enormous government efforts to prop it up for the past two years. Should the yuan start to lose steam again, the thinking goes, “it could further exacerbate capital outflows in a vicious cycle.”

It would also mean that bitcoin is set to soar even higher as some more of the $35 trillion in Chinese deposits seek quick and easy ways to circumvent China’s capital account “firewall”, and where despite Beijing’s posturing, cryptocurrencies remain the most effective mechanism of evading China’s capital controls. Some more details from the WSJ:

Tighter restrictions on money leaving China helped stem outflows and stabilize the yuan, which so far this year has recovered most of the ground it lost against the dollar in 2016. Improved faith in Chinese growth, now on track to handily meet Beijing’s target of around 6.5%, has also helped keep money from fleeing. But the outlook appears hazier in light of an expected slowdown in both property and infrastructure investments. Meanwhile, debt continues to pile up in the economy, leaving it vulnerable to a prolonged downturn unless the government takes more forceful measures, economists and analysts say. Official data released Monday show that while total credit growth dropped in November, as regulators forced banks to bring off-balance-sheet credit onto their books, bank lending jumped.

The Rest…HERE

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