Overseas Headlines- May 6, 2019

United States:

Trump’s Tariff Threat Leaves Beijing Stalling on Next Talks

Talks between the U.S. and China to resolve their year-long trade standoff appeared to be on life-support Monday, with Beijing struggling to respond to tweets by President Donald Trump that threaten an escalation of tariffs by the end of the week. China’s foreign ministry said that officials were still planning to travel to the U.S. for the next round of talks — but was unable to confirm when amid signs that a delay is now being considered. Meanwhile, a media blackout on Trump’s threat left investors baffled as stocks and the yuan tumbled on rumors that the trade war is now back on. “We are now trying to get more information on the relevant situation,” ministry spokesman Geng Shuang told a briefing in Beijing. “What I can tell you is that the Chinese team is preparing to travel to the U.S. for trade talks.” Trump on Sunday raised pressure on Beijing to strike a trade deal by announcing he would increase tariffs on $200 billion of Chinese imports Friday to 25 percent from 10 percent. He also floated the possibility of extending a new 25 percent duty on another $325 billion of imports not already covered. Trump continued tweeting on the trade situation Monday. “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!” he wrote. “Risks of a full blown trade war are escalating,” Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore, said before the ministry’s announcement. “Trump’s threat may backfire as China will not want to negotiate with a gun pointing at their heads.” Global equities tumbled and Treasury futures climbed on the news. The yuan slumped alongside crude oil. Futures on the S&P 500 Index sank as much as 2.2 percent, signaling a punishing start to the week on Wall Street, while European stocks slid and Chinese equities plunged. China was considering delaying a U.S. trip this week by a trade delegation led by Vice Premier Liu He after Trump’s tariff threat, according people familiar with the matter. Liu and about 100 other officials had been scheduled to arrive Wednesday for what was shaping up to be the final round of negotiations. It was unclear whether the threat reflected deeper concerns by Trump, who stunned North Korean leader Kim Jong Un by walking away from their nuclear summit in February, or a negotiating tactic. The U.S. had been targeting May 10 to announce a deal, that would be finalized and signed by Trump and Chinese President Xi Jinping later at an official summit, people familiar with the negotiations said last week.



Race to Replace Draghi Spurs ECB Calls for Fed-Style Rethink

The race to succeed Mario Draghi could end up producing not only a new European Central Bank president, but even a revamped mandate. That’s a potential outcome from a review of the institution’s strategy called for by Olli Rehn, a contender for the job who is willing to shake things up in his attempt to stand out from the crowd of candidates. The Bank of Finland Governor wants a rethink of the ECB’s master plan for ensuring price stability, at a time when no amount of stimulus seems enough to boost inflation. His idea is short on specifics but has raised his profile in a field of hopefuls that includes the heads of the German and French central banks, a serving ECB board member and even Rehn’s own predecessor. It could also backfire though, by splitting ECB policy makers and alarming some of the political leaders whose job it is to pick the next president this summer. “Rehn is clearly one of the guys angling for the top job,” said Peter Dixon, an economist at Commerzbank. Irrespective of his motivation, “it’s incumbent on central banks to ask themselves after ten years of zero, or in the ECB’s case negative, rates what more can they do to achieve their objectives.” The 57-year-old Finn, a former European Union Commissioner who took over as governor in July, is tapping into the zeitgeist by identifying seemingly entrenched low inflation and rates as a fundamental concern. The U.S. Federal Reserve is the most prominent central bank now rethinking how it operates in the post-crisis economy. Rehn isn’t offering solutions though. He says he simply wants to ensure ECB monetary policy remains credible, and reiterated that desire last week. The ECB last dived into its policy framework in 2003. For all the bank’s claims that its negative interest rates, massive bond purchases and other unconventional policies have been a success, euro-zone inflation has persistently fallen far short of the goal of “below, but close to, 2 percent.” “It’s just good practice for central banks to review occasionally what they are doing,” said Stefan Gerlach, chief economist at EFG International and a former deputy governor of the Irish central bank. “One can’t help but feel that some disagreements in the Governing Council have come from people having different interpretations of what the ECB’s definition of price stability meant in practice.” The calls for a rethink have some support. Austrian Governor Ewald Nowotny said last week that “aspects” of the mandate warrant revisiting. Agustin Carstens, the head of the Bank for International Settlements, said central banks are “acutely aware of the need to adapt” their frameworks.



China Ramps Up Credit Aid to Small Firms as Trade Tensions Rise

China decided to cut the amount of cash some banks must hold as reserves, and timed its announcement of the decision to help shore up domestic markets as uncertainties in the trade talks with the U.S. re-emerged. The required reserve ratio for rural commercial lenders serving companies in the county where the bank operates or with less than 10 billion yuan ($1.5 billion) of assets will be lowered to 8 percent, taking effect on May 15, the People’s Bank of China said on its website early Monday. The unusual timing of the announcement, as markets were opening, appeared to be in response to an escalation of the trade war by U.S. President Donald Trump. If trade tensions do resurface, China’s monetary policy will “likely turn dovish again” in support of the domestic economy, economists led by Song Yu at Beijing Gao Hua Securities Co. wrote in a note Monday. The cut will release 280 billion yuan of long-term liquidity, with about 1,000 county-level rural commercial banks qualified for the reduction, and all the newly released funding will be used in loans to private and small companies, the central bank said. The announcement had “special timing” also because the PBOC has not cut the reserve ratio in May since 2012, a month usually with less liquidity pressure, Ming Ming, head of fixed-income research at Citic Securities Co Ltd, wrote in a report. “The unexpected targeted RRR cut is likely made to ease market volatility,” he said. Trump threatened in a tweet to raise tariffs in the U.S.-China dispute as soon as this week, overturning recent signs that a deal was almost done. China’s benchmark Shanghai Composite Index closed down 5.6 percent, and both offshore and onshore yuan were weaker. The announcement comes after the State Council last month called for changes to allow medium and small-sized banks to set aside less money in reserves. The decision continues the targeted easing approach which policy makers have addressed the slowdown in the economy since last year — attempting to provide credit to needy sectors without flooding the market with cash. While the PBOC has come out twice in April to deny rumored reserve ratio cuts, the bank’s newspaper Financial News published an article early Monday to argue there is still room for more, signaling a policy tweak. “There are unsolved issues in the trade talks and the U.S. economy is doing better than expected,” said Nie Wen, an economist at Huabao Trust in Shanghai. “Hence there is a possibility for further escalation of conflicts if the two sides can’t forge a deal in a short term, and more easing including a universal RRR cut and even an interest rate cut are both possible.”


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