Donald Trump, as we’re all learning in graphic detail, is a creature of habit. Old haunts, old feuds, old ideas. The global community should play into this predisposition and coax him back to the New York hotel he once proudly owned.
The Plaza Hotel isn’t just an important episode in the real-estate-mogul-turned-U.S. president’s history. It was the site of the 1985 Plaza Accord on currencies that still stands a testament to what world powers can achieve when they cooperate. Granted, working jointly toward a common end doesn’t seem like a Trump disposition. But a Plaza reunion may be just the thing to talk Team Trump down from the trade war ledge on which it’s perched.
The focus of a new accord wouldn’t be Japan, but China. Beijing is struggling to support the yuan as traders bid it lower. That battle, which has driven China’s foreign reserves below the $3 trillion mark, is largely aimed at placating Trump. Sure, some of this support effort is about halting capital outflows. But Beijing’s duel with traders who think the yuan is overvalued is about avoiding the 45 percent tariffs Trump pledged on the campaign trail.
That risk has China again flouting the International Monetary Fund conventions it promised to honor. Its inclusion in the IMF’s special drawing rights program in 2016 means President Xi Jinping’s government should bow to market views about the yuan’s value. It should be sharply lower as investors weigh Beijing’s debt profile, bubbles and slowing growth prospects. SAD! as Trump might tweet. To avoid a clash with the new White House, Beijing is playing the role of the boy with his finger in the proverbial dike. It’s doing so against its short-term interests to avoid great economic pain in the longer run.
Why not devise a grand currency bargain instead? The Plaza Accord days when the then-Group of Five nations could agree on big things seem distant. But the threat of a destabilizing currency battle is more acute now than in 1985. Partly, that’s because Trump’s worldview often seems stuck in the same bygone era. Trump’s zero-sum take on China-U.S. relations only makes sense when viewed through a 32-year-old lens. Slapping taxes on Chinese imports and demanding big exchange rate moves won’t pull millions of jobs back to America, as they might have three decades ago.
What Trump can do, though, is sit down with Chinese officials and hammer out an acceptable and sustainable dollar-yuan trading range. Xi’s government can spell out its own internal frailties and pressures. Trump’s team can detail why it believes a U.S. manufacturing renaissance relies more on exchange rates than domestic innovation, education and training. Either way, even the appearance of cooperation is better than market volatility and rhetorical barbs.
There’s another issue Chinese Finance Minister Xiao Jie and U.S. counterpart Steven Mnuchin must discuss: debt. Xiao said this week that Beijing has considerable latitude to increase its budget deficit ratio to pump new stimulus into a flagging economy. Mnuchin’s Treasury Department also will likely spend most of its time churning out IOUs to pay for Trump’s pricey mix of infrastructure projects, military spending, tax cuts, new deportation forces and walls on U.S. borders.
All that issuance, on top of Japan’s and Europe’s, will surely crowd out private sector financing, running counter to expectations by Xi and Trump that public largess will generate massive job creation. It’s an added risk to a global system weaning itself off zero interest rate policies. It also creates a mutually assured destruction clause in the Beijing-Washington relationship that requires great care.
China’s government debt ratio — about 260 percent of gross domestic product — bears watching because it’s both a developing economy and the world’s second-biggest. Up from about 160 percent in 2008 of GDP, Beijing’s debt tally also must be considered along with explosions of local government debt and credit churned by an opaque shadow banking system. The official numbers, in other words, don’t even get close to measuring China’s real risk profile.
A new Plaza Accord also must involve a Japan looking to devalue as much as it can get away with and a Europe that always seems one credit downgrade or election away from crisis. In a post-Brexit world that often seems to be spinning out of control, a summit of the printers of, say, the five most traded currencies could calm nerves everywhere. It might give Trump his first big foreign policy deal — and victory. What’s more, Trump could use this platform to push back at China’s own protectionism. For all Xi’s talk of level playing fields, China shields its services and technology sectors and subsidizes state-owned enterprises.
If it makes this creature of habit more comfortable, why don’t finance chiefs from China, Europe, Japan and Britain visit the White House or Trump Tower instead of the Plaza? The where doesn’t matter. What does is that Xi and Trump avoid mutually assured disaster.
William Pesek is executive editor of Barron’s Asia and writes on Asian issues. www.barronsasia.com
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