Trump Giving China Cause To Cut Rates, Weaken The Yuan

(MENAFN- Asia Times) Life is getting more and more challenging for officials at the People's bank of China. Governor Pan Gongsheng already faced a daunting list of dilemmas before the Donald trump 2.0 era arrived.

Battling deflation amid a confidence-killing property crisis and weak consumer demand is trial enough. So are near-record youth unemployment and local government finances in disarray.

Yet Pan's way forward has him navigating around Trump's intensifying trade war and the US federal Reserve's own troubles, too.

No doubt the PBOC's rate cut plans are somewhat contingent on what Fed Chairman Jerome Powell does. Earlier this week, the Fed left rates unchanged for a second straight time as US inflation runs hotter than hoped.

Trump wasted no time urging the Fed to“do the right thing” by slashing borrowing costs, the populist president's latest attempt to pressure Powell to do his administration's political bidding and unwisely add liquidity to an economy that's near full employment.

For now, Powell's team is holding its ground. Yet Trump's infringement on the Fed's much-vaunted independence is a clear and present danger for Asia's various dollar-dependent economies.

For all Asia's efforts to wean itself off the US currency these last 25 years, the region remains highly dollar-centric in trade and finance. It's also home to many of the largest holders of dollars as part of their foreign-exchange stockpiles.

Any move that tarnishes the Fed's credibility or Washington's credit rating could send Asian bond yields higher and put asset markets at risk. The resulting surge in US yields could reduce the wherewithal of American consumers to buy Asian goods .

Trump is also trolling credit rating companies with a push for giant tax cuts. And giving his political benefactor Elon Musk access to sensitive Treasury Department data and the federal payments system – moves that could further imperil trust in US government debt.

These risks put the PBOC in a tight spot.“Mixed data strongly suggests the need for policy action by the People's Bank of China,” says Carlos Casanova, senior Asia economist at Union Bancaire Privee.

Economist Gary Ng at Natixis notes that“there's a growing chance that China will cut rates in the next meeting or so” amid calls to“support consumption.” If retail sales don't improve and inflation remains weak, Ng says,“we may see a rate cut as early as April.”

But Xi's economic priorities strongly suggest that if Pan does cut rates he will do so cautiously in light of what easier monetary policy might mean for the yuan. On Thursday (March 20), the central bank left its key lending rate unchanged. Its one-year loan prime rate remains at 3.1% and the five-year loan prime rate is at 3.6%.

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