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China has monetary tools to counter trade battle

 China has monetary tools to counter trade battle

The world's two biggest economies have now been engaged in a tit-for-tat trade battle for three-and-a-half months.

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By Meili Chen 15.10.2018

China’s central bank has recognized the “significant” risks from its long-running trade battle with the United States but believes that it still has a range of monetary tools available to counter the effects.

Speaking at the annual IMF and World Bank meeting in Bali on Sunday, PBOC Governor Yi Gang said that he agrees with recent warnings that worsening trade tensions could crimp global economic growth during the next 12 months. However, he noted that China is still on course to hit its 6.5% growth target for 2018 and could even exceed it.

The world’s two biggest economies have now been engaged in a tit-for-tat trade battle for three-and-a-half months. During that time, scores of products have received levies, and the US has threatened to introduce tariffs on effectively all Chinese imports. Neither side is willing to back down, and attempts to reach an agreement have failed.

This ongoing uncertainty has rattled investors, who are growing more fearful of risks and spillovers that could potentially derail the global economy. It is no surprise that trade conflict was high on the agenda as the latest IMF and World Bank meeting got underway in Indonesia on Friday, and Yi was eager to strike a positive tone as he touched on what needed to take place to address the problem.

"I think the downside risks from trade tensions are significant,” Yi noted on the sidelines of the meeting. “We still have plenty of monetary instruments in terms of interest rate policy, in terms of required reserve ratio. We have plenty of room for adjustment, in case we need it.”

Yi added that a “constructive solution” would be preferable, but a meeting of minds looks unlikely as US President Donald Trump continues to escalate the feud into a full-press offensive. The comments by China’s central bank follow IMF’s decision to revise its global growth forecast downward for the year from 3.9% to 3.7% after noting that trade worries could affect confidence worldwide.

China’s economy has managed to shrug off the impact for now and should see growth of 6.6% for 2018, but the medium-term outlook is less certain, as IMF cut the country’s growth forecast for next year to 6.2%. The financial institution also said that the trade war could lead to a 1.6% drop-off in growth during the next two years.

However, the tools that Yi referred to over the weekend are likely to offset the downturn as China looks to intervene and stimulate its economy with a raft of policy changes. The PBOC has already moved to cut bank reserves on four occasions in 2018, thus providing enterprises and households with greater leverage to borrow and spend.

UBS and Nomura are among the investors that believe that China is now easing its monetary conditions, but Yi noted on Sunday that it is still pursuing a “prudent and neutral stance.” He said: "So if you look at the broad money, if you look at the interest rate and you look at monetary conditions, basically you can have the conclusion that we have a prudent and neutral-stance monetary policy.”

US Treasury Secretary Steven Mnuchin also weighed in on the trade battle during the weekend, saying that the fight is not a threat to the world economy. The desire to push Beijing to open trade and business has underscored the United States’ efforts from the start, and Mnuchin hopes that it will eventually achieve that goal.

He added: "Our objective with China is very clear: it's to have a more balanced trading relationship. I think that if we are successful, this is very good for US companies, US workers, Europeans, Japan, all of our other allies and good for China."

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