Following the latest discussions between Chinese President Xi Jinping and his US counterpart Barack Obama, the momentum in the bilateral economic relationship is tipping away from Beijing.
During the previous summits, the narrative on US-China economic relations has been in the now-familiar pattern: China is ascendant, while the US is in decline; China can get things done, while America is mired in partisan politics; China’s influence is growing, while US dominance wanes.
But that narrative no longer fits so well.
Sure, China’s GDP continues to clock 7 percent growth, more than double the rate in the US. However, China’s figure appears a little shaky owing to pervasive doubts on the reliability of official data, and also because the trend is down.
The stock market collapse has shaken confidence in the infallibility of China’s policy makers. In contrast, the US seems to have found its feet again.
Changing US business perceptions of China also play a part. Even as China’s 1.3 billion people remain a draw for American companies, slowing growth and aggressive regulators are taking their toll.
Businesses that once encouraged US policy makers to soft pedal, as profits rolled in, may now step up pressure on Washington to press for equal market access.
What does that mean for future summits between the two nations?
If the US does indeed have more leverage, it shouldn’t waste it on the exchange rate. Market pressure is now for the yuan to fall, not rise. China’s central bank appears to be selling US Treasuries to prevent depreciation of the currency, instead of buying them to stave off appreciation.
Years of yuan appreciation have not closed the yawning bilateral trade imbalance. Since 2005, the Chinese currency has strengthened 30 percent against the dollar, but the US deficit with China has widened to US$340 billion in 2014. What that suggests is that a stronger yuan alone will not be enough to bring balance to the relationship.
Instead, the US should aim for greater openness in China’s services sector and capital markets. China’s financial sector remains largely the preserve of domestic firms.
Hyper-competitive American banks and brokers — until now confined to minority stakes — have long been hungry for a larger piece of the action.
More unimpeded access for international funds to the mainland equity and fixed income markets would also be a plus.
Managed right, that could be a win-win for the bilateral relationship.
China will get more efficient capital markets and greater international use of its currency, while the US will gain more market access for its financial firms and help boost the sale of services, helping offset continued losses on trade in goods.
The views expressed in this article are those of Tom Orlik, economist at Bloomberg Intelligence.
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