(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Jan 12 The 'border tax' Donald Trump and
Republicans are considering will spur capital flight from China,
with potentially large repercussions.
House Republicans back a plan for a border tax adjustment,
discussed at 20 percent, which would impose a levy on imports
while granting rebates to exports.
While the Republican and Trump plans call for a border tax
on all imports as a means to favor domestic production, Trump
has also used the term to describe a punitive tax he threatens
to levy directly on imports of companies which move production
abroad. As ever with Trump, it is highly unclear what he intends
or will attempt.
Trump has in the past floated the idea of a 45 percent
tariff on Chinese imports to the U.S., a higher rate than is
being discussed for the border tax adjustment.
For China, and for financial markets, this is going to cause
trouble, and not just because it would make Chinese and other
foreign imports to the U.S. less competitive.
A border tax implies a strengthening of the dollar,
prompting former Treasury Secretary Lawrence Summers to warn
this week of a "spike" in the greenback. All else being equal,
which it seldom is, a 20 percent border tax should prompt a
similarly large appreciation in the dollar. That won't likely
happen, in part because other countries will pile in with their
own border taxes or other measures, but the dollar would
get a sizable boost.
That poses a complex set of problems for China. Global
dollar borrowing conditions would become more expensive and,
importantly, pressure would intensify on the yuan to
weaken in response.
"The threat to Chinese stability at a time when it is
already having trouble trying to limit capital flight from a new
disruption of trade is a legitimate concern," David Levy of the
Jerome Levy Forecasting Center said in an interview.
"This is not a great time from a Chinese point of view or
global stability point of view to have anything that is
disruptive to the flow of trade."
One fear is that Chinese yuan owners, anticipating a dollar
spike, will try to front-run the effects on the yuan, seeking to
move money into other currencies or stores of value, either by
following Chinese rules or by skirting them.
The yuan, which trades in a band set by China, fell by 6.6
percent against the dollar in 2016 in a self-reinforcing
CAPITAL FLOATS, USUALLY
To be sure, China is not the nation most vulnerable to
dollar strength. That honor belongs to emerging market countries
which run a current account deficit and must attract dollars for
Yet two years of strong capital outflows have depleted
China's once, and arguably still, massive foreign currency
reserves. China's reserves fell by about $320 billion to $3.011
trillion in 2016, less than the $513 billion decline of 2015 but
also despite wide-ranging efforts by China to make capital
flight more difficult. Seeking to circumvent capital controls,
owners of yuan in China have turned to cryptocurrency Bitcoin,
which more than doubled in value between September and Jan. 4.
"Spot checks" on Bitcoin exchanges in China by state authorities
this week sent Bitcoin down by 12 percent. At any rate, money is
eager to leave by any route possible.
China still has huge FX reserves, but an IMF adequacy
framework implies it needs to keep about $2.7 trillion on hand.
At last year's depletion rate we will soon be there, and if a
border tax accelerates matters the issue could soon become
Asset management behemoth PIMCO said on Thursday China might
float its currency in 2017. Yu Yongding, an influential former
advisor to the People's Bank of China, said on Thursday the
central bank should set a "bottom line" depreciation level for
the yuan in 2017 of 25 percent.
Floating the yuan would certainly be a taste of his own
medicine for Trump, who has threatened to brand the country a
currency manipulator. It would also, however, potentially cause
a very strong outflow of capital. Foreign exchange reserves
would be preserved but capital flight could become a problem,
and a limit on other policies.
China is notable in that, with a semi-closed economy and
great central control, it has been able to stimulate its way out
of various upsets during and after the financial crisis. China
may find it has less room to maneuver if capital is leaving, or
if the yuan depreciates greatly, with or without a float.
Remember too, all of this would be happening in and to China
while most of the other emerging markets go through a crisis of
Regardless of its impact on U.S. exports, a border tax could
easily cause massive turbulence in global markets.
(Editing by James Dalgleish)