Tensions between the US and China are so elevated - and the prospect of a trade war between superpowers so grim - that every change in the economic backdrop is significant. So signs that Beijing is successfully containing capital outflows, and preventing its currency from depreciating against the US dollar, are crucial. After all, some of President Donald Trump’s anti-China rhetoric often takes the form of accusations of currency manipulation.
Confounding widespread expectations of a sharp depreciation, the renminbi, China’s currency, has in fact appreciated by 1.2 per cent against the US dollar during the first six weeks of this year, reversing some of the 7 per decline in 2016.
This relative stability has been engineered in part by a crackdown on capital outflows, which resulted in a slight decline in overseas investments by Chinese companies in January after a year of surging cross-border acquisitions. A gentle uplift of interest rates in domestic capital markets has enticed more Chinese money to stay at home rather than seek higher returns abroad.
Taken together, such measures may suggest that Beijing has been doing what it can to ease US-China trade friction before the expected confirmation of Wilbur Ross, Mr Trump’s choice for commerce secretary.
The impression that Beijing may be out to mollify the US administration was underlined by the news this week that China bought $9.1bn in US Treasury debt in December, breaking a six-month streak during which it was a consistent seller.
Of course, these subtle moves may do little to assuage the thumping sentiments expressed during Mr Trump’s campaign, when he accused China of the “greatest theft in the history of the world”, promised to brand Beijing a “currency manipulator,” and said he would slap a 45 per cent tariff on all Chinese exports to the US. In response China has mostly bided its time, though sections of its state-run tabloid media have threatened “tit-for-tat” revenge which would include boycotting US sales of Boeing aircraft, iPhones, soybeans, maize and other products.
Nevertheless, the US administration’s recent form on political issues shows that it is not incapable of retracing rhetorical moves. Mr Trump has backed away from his inflammatory suggestion that he would question the “One China” policy that has underpinned America’s approach to Taiwan since the normalisation of relations between the People’s Republic of China and the US in the 1970s.
In recent weeks the White House also seems to have tacked back to a more moderate position on China’s provocative island-building in the South China Sea. Early comments by Rex Tillerson, the new US secretary of state, had implied that the US might be contemplating a naval blockade of these artificial islands. This position has been diluted, easing concerns over a potential military clash.
Against this background, China’s decision to avoid antagonising Washington on trade issues seems sensible. With 18 per cent of Chinese exports going to the US and some 20m Chinese employed in making the things that Americans buy, Beijing would be foolish to ignore the blow its economy would sustain in a trans-Pacific trade war. Keeping the renminbi stable may largely be in China’s own interests as well.
The government is struggling to curb capital outflows that last year ran to several hundreds of billions of US dollars. It appears to have decided that as long as its citizens believe the renminbi will stay strong, they are less likely to spirit their money overseas. For now, cool heads have prevailed and that is to be welcomed.
