Posts Tagged ‘currency’

Preparing For A China Economic Shock

February 23, 2017
Feb. 22, 2017 2:02 PM ET



Michael Roat

Long/short equity, contrarian, value, macro


China is facing a multitude of economic and financial stability issues.

The yuan will once again be under speculative pressure.

Avoid the commodity sector for the near term as China is a major demand center for commodities.

A China financial shock will lead to risk aversion in global markets.

A restructuring of China’s corporate sector and economy is necessary and inevitable. China will emerge stronger after this reset and economic rebalancing.

The narrative in the market currently is a stable Chinese (NYSEARCA:FXI) economy and financial system. In reality, the truth is closer to the opposite. Improvement in Chinese economic data and corporate earnings over the course of 2016 seems to suggest everything is okay, but it is unsustainable.

The issues facing China are numerous and include slowing GDP growth, overcapacity, extremely high corporate debt, capital outflows associated with a speculative run on their currency, non-performing loans, a recent stock market rout and an overheated property market. The investment demand growth model has run out of steam for China and any further intent to pursue credit growth through investment will only lead to diminishing GDP returns and more overcapacity.

Investment demand accounts for 42.3% of GDP in China. Exports and government expenditures account for 20.5% and 14.2% respectively. Consumption is approximately 38%. In the United States, consumption is near 70% of GDP with investment at 16%. Exports account for 12% in the U.S. and government spending is at around 18%. This shows China’s over-reliance on investment to fuel GDP growth. While investment led demand models for economic growth can be effective short term, there are long-term risks to running such policies.

The fact is that continued investment leads to overcapacity. There are also diminishing returns to such a growth model. For example, China has numerous ghost cities that were built, yet remain unpopulated. While it is feasible for the rural population to move into these cities over the next ten to fifteen years, investment in infrastructure in China is overdone in the near term and should not be counted on to further increase growth.

There is also major overcapacity in the corporate industrial, and particularly commodity production sectors. This is decreasing corporate profitability. There are diminishing returns to investing simply to increase GDP rather than to earn a sufficient rate of return on investment.

Buoyant property markets in China and higher commodity (Vale (NYSE:VALE) Rio Tinto (NYSE:RIO) Cheniere Energy (NYSEMKT:LNG)) prices have recently improved China’s corporate earnings. The Fed deciding not to raise interest rates over most of 2016 also contributed to improved commodity prices. This is changing, as the Fed has signaled its intent to increase the Federal Funds Rate again in the near term, potentially March (NYSEARCA:USDU) (NYSEARCA:UUP) (NYSEARCA:TTT) (NYSEARCA:TBT) (NYSEARCA:TLT) (NYSEARCA:TMV).

Also, authorities in China have introduced restrictions to cool the property market and housing prices. If there is a downturn in commodity prices, as the Fed moves, the U.S. dollar appreciates and China’s economic concerns heighten, it will undoubtedly affect corporate earnings in China negatively. Chinese corporate debt is at approximately 170% of GDP compared to around 40% in the United States.

For China to maintain any semblance of corporate debt stability, there must not be a downturn in corporate earnings growth. As one can see in the chart below, China’s industrial profits are correlated with producer prices (commodity prices). Corporate debt denominated in the USD, which is expected to appreciate, will also increase the real burden of Chinese corporate debt.

The Chinese yuan is also likely to depreciate. There is a high speculative interest in shorting the yuan. China’s foreign exchange reserves, used to defend the currency, have fallen from around 4 trillion to 3 trillion since early 2014 as shown in the chart below (NYSEARCA:CNY). This is likely to continue and there is substantial doubt in markets whether China will have enough reserves to prevent a decline in their currency.

While a moderate depreciation wouldn’t be discouraged because it boosts export competitiveness (an economic positive), too much of a depreciation will increase capital outflows from China, an economic negative. The PBOC and Chinese authorities largely want a stable currency. As economic slowing and financial unraveling in China begins and picks up pace, the People’s Bank of China (PBOC) will likely move into a more dovish policy stance and lower interest rates.

Lower rates put downward pressure on a currency. There is also approximately 1 trillion of USD denominated debt owed by Chinese corporations. If the yuan depreciates versus the U.S. dollar, this debt becomes more difficult to service, so the PBOC will have to keep this in mind while trying to engineer an orderly depreciation of the yuan.

China’s housing and property markets are of major importance to the Chinese economy. Housing speculation is rampant in China and this has pushed up prices. It seems the Chinese economy is simply moving from one bubble to another, whether it be stocks in early 2015, copper/commodities in 2011 or home prices currently. Chinese home prices in Tier 1 cities have appreciated 80% since 2010 and an average of 40% for all cities.

The Chinese government is placing restrictions on home ownership to cool off prices. These include limiting the number of properties a person can own and increasing minimum down payments. The property market in China is overheated and these policies, along with speculatively inflated home prices, could end up leading to a potential bust in the Chinese housing market.

Commodity, oil ((NYSEARCA:USO), Resolute Energy (NYSE:REN), Marathon Oil (NYSE:MRO), BP (NYSE:BP), Chesapeake (NYSE:CHK), Shell (NYSE:RDS.A) (NYSE:RDS.B), Halliburton (NYSE:HAL)) and metal prices (NYSEARCA:SLV) (NYSEARCA:GLD) (NYSEARCA:GDX) (NYSEARCA:GDXJ) are likely to decline (NYSEARCA:DUST) (NYSEARCA:JDST) in the near term. While I hold a long-term optimistic view on oil prices and the commodity sector, I believe China’s slowing growth, heightened Chinese economic and financial concerns, and a cooling property market will weigh on commodity prices.

Also, the Fed raising rates and subsequent dollar appreciation will affect commodity prices. Most commodities are oversupplied. Oil inventories are elevated and keep showing a persistent build with U.S. rig counts climbing. Iron ore producers are ramping up production with a volume over-pricing mentality. Forecasters are factoring in strong Chinese demand for commodities, so any negative developments in China will sharply affect prices.

An economic and financial shock in China will likely lead to a risk-off sentiment in global markets (NYSEARCA:SPY) (NASDAQ:QQQ). I could see a flattening or correction in U.S. stocks as a result. I believe conditions in China will deteriorate rapidly. The Fed raising the rate potentially in March is a catalyst for this China shock as it would lead to the U.S. dollar appreciating and the Chinese yuan likely coming under speculative pressure once again.

Long term, I think China will emerge stronger, but it will be rough in the interim. China must rebalance their economy towards more consumer-based demand rather than investment. China has a low level of household debt, so this would support a long term rebalancing towards consumption-led GDP growth.

A depreciating yuan will provide a boost to exports as well. This can be seen in the chart below. As the real effective exchange rate for the yuan has appreciated, export growth has declined. A lower yuan will allow China to regain export competitiveness. The authorities in China must come up with a comprehensive plan to deal with the incoming conditions especially high corporate debt and non-performing loans.

A state-backed, banking system recapitalization should be on the table if there is a downturn. Only after this economic reset, will I be more optimistic on China. I think this will all resemble the 1997 Asian Financial Crisis rather than a global 2008 type crisis.

Foreign investment is not leaving China: commerce minister

February 21, 2017


China’s commerce minister on Tuesday sought to assuage concerns that foreign investment is leaving the country, saying claims to that effect were “biased.”

In comments made to reporters, Gao Hucheng didn’t elaborate on the ministry’s views though data over the past few months have shown a pick up in fund outflows.

“In recent years some products have indeed moved offshore but at the same time many high-end industries have moved to China,” Gao told reporters.

Foreign direct investment to China fell 9.2 percent in January to 80.1 billion yuan.

An annual survey from the American Chamber of Commerce in China released last month showed that more than 80 percent of its members felt less welcome in China than before and most had little confidence in China’s vows to open its markets.

Since late last year, authorities have also been tightening restrictions on capital outflows, reining in what officials have called “irrational” outbound investment.

The curbs probably explained a fall in outbound direct investment, which plummeted 35.7 percent in January to 53.27 billion yuan, the weakest in over a year.

Gao added that consumption will continue to grow rapidly this year, while the foreign trade environment will remain complex.

Cooperation is the only option for the U.S.-China trade relations as a healthy relationship is beneficial for both sides, he said.

Although there have been disagreements between the two countries in the past, they were solved through negotiation, Gao added.

Tensions between China and the United States have heightened since the start of the year after U.S. President Donald Trump criticized Beijing for harming American companies and consumers by devaluing its yuan currency.

Throughout his election campaign, Trump threatened to levy punitive tariffs against China in order to bring down the U.S. trade deficit, keeping global markets on edge.

(Reporting by Elias Glenn; Writing by Sue-Lin Wong; Editing by Shri Navaratnam)


Chinese Minister Appeals to Washington to Avoid ‘Trade War’

February 21, 2017

BEIJING — China’s commerce minister has appealed to Washington to negotiate disputes with Beijing and avoid a “trade war” that he warned would hurt both sides.

Gao Hucheng, responding to a question about President Donald Trump’s promise to raise taxes on Chinese imports, said at a news conference Tuesday the two governments should work together to promote trade.

Gao said a trade war “should not become an option.” He appealed to Washington to “properly solve” disputes through “dialogue and cooperation.”

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Trump promised during his election campaign to raise import duties on Chinese goods to 40 percent but has yet to take formal action. He also promised to declare Beijing improperly manipulated the exchange rate of its yuan to give its exporters a price advantage, which would open the way to other sanctions.



China’s huge debt poses big headache for central bank

Monday, February 20, 2017 – 16:09

[BEIJING] Chinese banks lent more money in January alone than the annual GDP of South Africa, as borrowers rushed to take advantage of government policies intended to stimulate the economy with easy credit.

But the free-for-all has had unintended consequences, creating a tottering tower of unsustainable debt, with Beijing now trying to tighten monetary policy and reduce access to credit without bringing the entire edifice crashing down.

Chinese debt exceeded 270 per cent of the country’s GDP by the end of 2016, stoked by multiple interest rate cuts as well as the growth of the unregulated “shadow finance” credit sector which involves lending to already indebted companies.

Thanks in part to the easy credit, China’s economy – a key driver of global growth – expanded by 6.7 per cent last year, with a construction boom and increased public spending on infrastructure.

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People’s Bank of China

But the world’s second largest economy is now saddled with an unwieldy debt load, Andrew Fennell of ratings agency Fitch said in a January 23 note, adding that “China’s stable growth reflects stimulus, not sustainability”.

Standard & Poor’s also warned that “reliance on credit-fuelled growth poses the downside risk of a hard landing for the economy”.

The People’s Bank of China (PBOC), the country’s central bank, helped stimulate the out of control lending with multiple interest rate cuts between the end of 2014 and 2016, lowering the cost of credit.

The abundance of cheap cash has had unexpected consequences: the cost of garlic jumped 80 per cent last year on speculation, investors poured money into bitcoin and real estate prices in some parts of the country have gone through the roof.

Last year the average price per square metre jumped 14 per cent in Beijing, 38 per cent in Nanjing and a staggering 49 per cent in the southern city of Shenzhen.

At the same time, empty apartment buildings have mushroomed across other cities where builders are struggling to find clients willing to invest in their speculative ventures.

The “monetary policy has only inflated the real estate bubble,” economist Zhong Pengrong, CEO of Shiye, told AFP.

“If the market collapses, the risk is immense,” he said.

Although a dozen municipalities have recently tightened rules on apartment purchases, overheating persists, with home loans accounting for a record one-third of bank lending in January.

Hamstrung by the need to prop up growth while also reining in speculation, the PBOC has sent mixed signals on monetary policy.

It injected additional liquidity into the financial system before the Lunar New Year, when demand for cash is traditionally strong.

Then in early February the bank raised short-term rates in the money market by 10 basis points for the first time in four years.

Societe Generale analyst Wei Yao said the bank was attempting a precarious balancing act.

“The high debt level and the previously hasty expansion of banks’ balance sheets make the financial system vulnerable to too abrupt a change,” she said.

“The tightening cannot be too harsh.”

Authorities are also worried about the intensifying risk of corporate defaults, particularly in the unregulated “shadow finance” sector that covers loans to heavily indebted manufacturers and property developers.

Social financing – a broad measure of credit including that offered by non-bank entities – soared to 3.740 trillion yuan (S$773.747 billion) in January, double that in December, according to the PBOC.

These unregulated schemes include company-to-company lending, which jumped 20 per cent in 2016 to US$1.92 trillion, according to data firm CEIC.

Commercial banks have traditionally been reluctant to loan money to small and medium-sized businesses, regardless of interest rate cuts, leaving owners with little choice but to turn to “shadow financiers” to quench their thirst for liquidity.

A jump in interest rates is unlikely to affect the demand for this kind of lending, meaning there is no immediate solution in sight.

Under these conditions, analysts say, it will likely take a long time to get China’s debt monster under control as the country attempts to re-balance its economy.

“China economy is a bit like a high-speed train,” Zhang Fayu, economist and manager for assets management firm Million Tons Capital in Shanghai, told AFP.

“It must slow down well in advance before turning.”


China’s growth stabilises, but dangers loom — Some economists say slowing economy is the classic definition of a burst credit bubble

February 20, 2017

Lack of clarity about President Donald Trump’s economic policies adding to the uncertainties facing the mainland economy, according to observers

By Wendy Wu
South China Morning Post

PUBLISHED : Monday, 20 February, 2017, 12:26pm
UPDATED : Monday, 20 February, 2017, 12:26pm
Economic and financial movements in the US were the biggest uncertainty globally given the lack of details about President Trump’s economic policies.

China’s economic growth looks stronger so far this year, but the country still faces financial risks and uncertainties created by the lack of clarity over the policies to be pursued by Donald Trump’s administration in Washington, Chinese economists said.

The world’s second-largest economy is likely to grow by seven per cent in the first quarter due to a recovery in manufacturing and exports, said Liang Hong, chief economist at China International Capital Corporation, a leading brokerage firm in the mainland. That compares with growth of 6.8 per cent posted in the final quarter of last year.

Without black swan events such as “a cliff fall in external demand” or a rapid rise in real interest rates in China, the nation’s economic recovery will continue, Liang told a forum held by the National School of Development at Peking University on Sunday.

However, the risk of capital flowing out of the country will persist as the US Federal Reserve is likely to continue to raise interest rates, said Guan Tao, a former senior official at the State Administration of Foreign Exchange.

This is forcing China’s central bank to walk a fine line between monetary easing and tightening.

The People’s Bank of China has refrained from lowering the amount banks must hold in reserves or cutting interest rates for almost a year for fear of fuelling asset bubbles and weakening the strength of the country’s currency.

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People’s Bank of China

The People’s Bank of China said in a quarterly monetary policy report published on Friday that it would focus more on managing financial risks as the downward pressure on economic growth “has lessened”.

However, the central bank will still need to cut banks’ reserve ratios to release cash into the economy, according to George Wu, a former monetary policy official at the central bank and now chief economist at Huarong Securities.

“The technique and timing [for the central bank] to adjust is very important,” he said, pointing out that China’s deposit reserve ratio remains one of the highest among the major economies.

“Within all levels inside the government, there is a lack of lack consensus on many issues: whether financial risk is the biggest risk, whether supervision is problematic, whether these are the responsibilities of the central bank and financial regulators,” said Wu.

Part of the reason was that there are many uncertainties beyond Beijing’s control, one economist said.

Zhu Min, former deputy director of the International Monetary Fund, said economic and financial movements in the US were the biggest uncertainty globally given the lack of details about President Trump’s economic policies.

But Trump’s pledge to cut taxes, if pursued, would add fuel to Chinese enterprises investing in the US, said Zhu, who is the director of the National Institute of Financial Research at Tsinghua University in Beijing.

He said political factors would affect US economic policy decisions and rising protectionism and the backlash against globalisation around the world risks creating further political instability.

“We will see greater volatility in financial markets this year,” he said.


Opinion: China’s economy is dangerously close to unraveling

Published: Feb 18, 2017 1:48 p.m.

The country’s debt is rising dramatically, while growth in gross domestic product is slowing

Getty Images
The People’s Bank of China in Beijing.

Market Watch

It came not with a bang but a whimper.

The January data from China finally confirmed that the country’s foreign-exchange reserves fell by $12.3 billion to $2.998 trillion, which compares with the all-time high of $3.993 trillion in June 2014 (see chart).

A trillion here, a trillion there, and pretty soon we’re talking real money, right?

What the official reserve data do not show is that massive borrowings outside China have accumulated over the past 15 years, bringing net reserves down to about $1.7 trillion, according to statistics prepared by Kynikos Associates.

That much smaller reserve amount is not necessarily large enough to support the yuan exchange rate, particularly if foreign-exchange outflows accelerate again as the Chinese credit bubble has now burst, in my opinion.

An acceleration in borrowing with a slowing economy is the classic definition of a burst credit bubble.

Ivan Martchev

China has a total debt-to-GDP ratio of close to 400%, if one includes the infamous unregulated shadow banking system that is habitually omitted from official statistics. In 2000, China’s total debt-to-GDP ratio stood near 100%. As Chinese GDP grew from $1.094 trillion at the end of the 20th century to $11.75 trillion at the end of 2016, the country’s total leverage ratio ballooned. China’s economy grew 11-fold, and total credit in the financial system surged by over 40-fold.

As the Chinese economy slows (see chart), the level of borrowing is accelerating, as can be seen here in China’s “total social financing” data.

This credit metric includes off-balance sheet financing outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. If Chinese GDP continues to slow (and there are many observers, myself included, that do not believe the official 2016 GDP growth rate of 6.7%), and total credit in the economy continues to surge, then the Chinese economy will in effect be running as fast as it can just to stand still. An acceleration in borrowing with a slowing economy is the classic definition of a burst credit bubble.

Partially inaccurate statistics

What was most surprising in 2016 is how orderly the situation in China was. There is also evidence of a slight uptick in economic activity, if one looks at the official statistics. But I don’t believe it to be fully accurate, because the Chinese have a history of “smoothing out” their official economic statistics. For example, their 34% devaluation of the yuan in December 1993 was aimed to help China deal with a recession that was never officially acknowledged. Evidence of the recession only showed up in secondary loan-loss data and other “undoctored” metrics.

I am surprised at the current calm in China, as credit bubbles tend to pick up speed and get rather disorderly when they begin to unravel. I don’t know if this unraveling will come in 2017 or later, but I am watching the official forex reserve data for evidence of accelerating outflows, which would be one sign that the unraveling is picking up steam.

Trump to accelerate China’s woes

On top of China’s own epic credit bubble, we have a phenomenon called Donald J. Trump, who has made it a priority to rebalance the U.S. trade deficit. While I fully support the president in his quest, he appears to point the finger at both China and Mexico in the same fashion. However, the Mexican situation is very different from the one with China, where the trade imbalance is running out of control.

Also see: Donald Trump picks the wrong target with his Mexican standoff

In 2016, as this table shows, the Chinese bought $115.775 billion of U.S. goods and services, while the U.S. bought $462.813 billion worth of Chinese goods and services, which makes for a gargantuan $347 billion trade imbalance and accounts for the lion’s share of the total U.S. trade deficit (see chart).

To be fair to Trump, the Chinese have been running a persistent trade surplus with the rest of the world over the past 10 years (see chart), but that surplus has been getting bigger because exports to China are slowing with the decline in Chinese GDP growth.

Trade as a political tool

More importantly, the Chinese have been using trade as a political tool as they habitually run bilateral trade deficits with many of their Asian trade partners to increase their political influence in the region. Such trade strategies are unlikely to influence the Trump administration, which is hell-bent on rebalancing the U.S.-China trade imbalance.

Trump’s clash with China on the trade issue comes at precisely the wrong time for the Chinese as their epic credit bubble is unraveling. While trade frictions and financial issues in China are unrelated events, Trump’s election is like kerosene thrown on an already burning economic fire in China. What I foresee happening here is similar to the Asian crisis in 1997-1998, this time emanating from China, with the caveat that today’s Chinese GDP is much bigger than total Asian GDP in 1997.

To those who may suggest I am merely making observations and not predictions, please see my January 23, 2015, MarketWatch article, “Why 2015 could be rough for China,” which I wrote before the bulk of China’s $1 trillion foreign-exchange outflow materialized. I am not sure if 2017 will be the year when the wheels come off the wagon in China, but I have seen increasing evidence of my credit-bubble theory coming to fruition and the economic repercussions likely to follow.

Ivan Martchev is an investment specialist with institutional money manager Navellier and Associates. The opinions expressed are his own.


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Trump’s Currency Complaints Hit Unexpected Targets

February 17, 2017

Top-five trading partners China, Japan and Germany brush them off; Taiwan and Switzerland seem to be paying heed


Feb. 17, 2017 3:47 a.m. ET

HONG KONG—U.S. President Donald Trump’s accusations of currency manipulation appear to be reaching an audience he may not have primarily intended.

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies,…

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies , while his top trade adviser Peter Navarro has accused Germany of benefiting from what he termed the “grossly undervalued” euro .

All three countries, which rank among the U.S.’s top five trading partners, have brushed off the Trump administration’s claims.

“No one has the right to tell us that the yen is weak,” Japan’s finance minister Taro Aso told parliament on Wednesday, following last weekend’s meeting between Mr. Trump and Prime Minister Shinzo Abe . Japan hasn’t directly intervened in currency markets since 2011 following a major tsunami and resulting Fukushima nuclear disaster.

“The charge that Germany exploits the U.S. and other countries with an undervalued currency is more than absurd,” Jens Weidmann , the president of the German central bank, said earlier this month.

China hasn’t directly commented on Mr. Trump’s criticisms, but most analysts say Beijing recently has been propping up the yuan by selling foreign-currency reserves rather than looking to weaken it.

Still, some smaller economies look like they are taking notice, notably Taiwan and Switzerland. The U.S. Treasury found in October that both had engaged in persistent, one-way currency intervention, essentially by buying foreign currencies like the U.S. dollar and selling their own to maintain weak exchange rates.

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Analysts say the central banks of Switzerland and Taiwan are now stepping back from those activities, perhaps to avoid closer scrutiny from the Trump administration. The upshot: The Swiss franc has advanced nearly 2% against the U.S. dollar this year, while the new Taiwan dollar has surged 5.3%. Both have outperformed the euro and yen since the U.S. election in early November.

Taiwan’s central bank bought $500 million in foreign currencies in the fourth quarter, well below its quarterly average of more than $3 billion since 2012, according to Khoon Goh , head of Asia research at ANZ in Singapore, who said he suspects it is stepping back from “currency-smoothing operations.” The central bank said it doesn’t comment on currency policy.

For the first nine months of last year, the Swiss National Bank /quotes/zigman/1379668/delayed CH:SNBN +0.12% intervened heavily in currency markets to slow the franc’s rise, spending an amount roughly equivalent to its current-account surplus for the period, J.P. Morgan/quotes/zigman/272085/composite JPM -0.76% analysts note. Over the following four months, the scale dropped to around two-thirds of the surplus.

“It’s not an entirely fanciful suggestion that the SNB might be tapering intervention in order to the guard against the risk of being cited by the U.S. Treasury as a currency manipulator,” the analysts wrote in a note.

The Swiss National Bank declined to comment.

For the U.S. to label an economy a currency manipulator under the current law, it must have a large trade surplus with the U.S. and a hefty current-account surplus and persistently intervene in the currency in one direction. As of October, no economies met all three criteria.

Recent comments from officials in South Korea, which the Treasury has flagged for its hefty trade surplus with the U.S. and its current-account surplus, suggest they’re similarly eager to avoid U.S. ire, says Govinda Finn , senior analyst at Standard Life Investments in Edinburgh. The Korean won has surged 5.2% against the dollar this year.

But any gains in the Korean and Taiwanese currencies due to U.S. political pressure may not last, he said: “On a longer-term horizon, there’s a pretty strong case to say both of those currencies can and will weaken as the authorities look to support their economies.”

Jenny W. Hsu contributed to this article.

Write to Saumya Vaishampayan at

Why the U.S. Could Suffer Deeper Economic Shock Than China in a Trade War

February 14, 2017

Retaliation could cause inflation to surge and cut demand for U.S. goods

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Feb 13, 2017 7:02 am ET

A lot of economists aren’t factoring a U.S.-China trade war into their central forecast scenarios, counting on the Trump administration to curb its sharpest protectionist tendencies.

But what if it doesn’t?

“Bad for the world, worse for the U.S.,” says Nicholas Fawcett, a senior global economist with Goldman Sachs. “Trade is not a zero-sum game; by curbing imports, the U.S. could lose out in the long run.”

Mr. Fawcett figures a 45% tariff on Chinese imports and 35% fees on goods from Mexico translate into an effective tariff rate of around 11%, given their share of total U.S. trade.  Assuming Beijing and Mexico City retaliate with equivalent tariffs, he estimates it could depress U.S. gross domestic product by 0.7 percentage point by 2019. That’s more than twice the hit on China’s growth, at 0.3 percentage point. Roughly 21% of the value of U.S. imports are from China, more than double that of China’s imports from the U.S.

The most immediate impact would be a surge in prices for American consumers, given that around 10% of the basket of prices that comprise the inflation index is imported. The U.S. imports roughly three-quarters of its toys, shoes, computers and telecoms equipment from China and other Asian emerging markets.

The higher costs for U.S. goods abroad would also sink demand for American exports.

“In fact, tariffs would likely hit U.S. GDP so sharply that the Federal Reserve would be prompted to reduce interest rates to cushion the blow—despite an increase in inflation,” Mr. Fawcett says in a Goldman Sachs research report.

Ian Tomb, a macro strategist with Goldman, says either a surge in input costs for U.S. production or falling demand “could prompt globally connected firms to reduce wages and cut workers.”

That’s why among the losers will be some of his most ardent supporters: blue-collar workers who helped sweep him to election victory.

The fallout would spread to other countries, including Europe and Japan, as U.S. demand for international goods slumped. U.S. allies with strong trade relationships with China such as Korea would get hit from both sides of the shock. And with the Fed cutting rates and the dollar subsequently weakening, the yen and the euro would appreciate, adding to their woes.

The potential danger of a trade war is why the International Monetary Fund and others aren’t including a tit-for-tat tariff brawl in their projections. (Here’s why the IMF is worried about rising protectionism globally.)

But, warns the Institute of International Finance, “The likelihood of harsher trade initiatives should not be underestimated.”


China will likely withstand the shock of a trade war better than the US will

Friday, 27 Jan 2017 | 3:44 PM ET

China setting itself up as 'the reassuring power'

China setting itself up as ‘the reassuring power’: Expert  Friday, 27 Jan 2017 | 3:58 AM ET | 03:14

While China will suffer from a trade war with the United States, some experts say the Asian giant has more resilience than the U.S.

The “Chinese government has plenty of financial resources to step in,” said Arthur Kroeber, founding partner of Hong Kong-based financial services and research firm Gavekal Dragonomics.

“I think the Chinese government has looked at this and is prepared to act,” Kroeber said, speaking by phone from Beijing.

In the last few decades, the communist government in Beijing has built China into the world’s second-largest economy with a state-backed form of capitalism and has expanded the nation’s global reach. A large portion of that growth came from heavy-handed policies that favored domestic industries, displaced more than a million people for infrastructure projects and generated questionably high levels of debt.

US/UK trade deal hype is overblown: HSBC strategist

Currency angle massive for China this year: HSBC  Friday, 27 Jan 2017 | 1:07 AM ET | 00:51

But key to China’s rise has been access to the global market, particularly the U.S. consumer. And in the very near term, that makes the Asian giant vulnerable to increased tensions with the U.S.

China was the largest source of goods imported to the 2015, according to an estimate from the Office of the U.S. Trade Representative. The U.S. goods trade deficit with China was $366 billion in 2015, meaning the U.S. bought far more from China than the other way around.

“If there is a full-fledged trade war, China is going to get hurt disproportionately to the U.S.,” said Jacob Shapiro, director of analysis at Geopolitical Futures, an online publication that analyzes and forecasts the course of global events.

“It’s not really about what China wants. China needs access to the U.S. consumer market,” Shapiro said. He doesn’t expect tensions to escalate into a trade war.

Could be more action in China ahead of the year of the rooster: Haitong

Could be more action in China as year of the rooster begins: Expert  Friday, 27 Jan 2017 | 1:07 AM ET | 02:11

U.S. President Donald Trump has promised a policy of “America First” and bringing back jobs, ostensibly lost to China. He has also threatened tariffs on goods imported from the Asian giant and chosen a group of outspoken China critics for top positions on trade policy.

However, Beijing has an array of tools to strike back with, and the message from the state is it will use them. China’s state-backed Global Times said in an English editorial after the U.S. presidential election that:

“A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S.”

“There’s an array of things China could do that are not trade related that would enable them to persuade in a personal way,” Kroeber said, adding that Beijing could also make China a tougher business environment for U.S. companies operating there.

In the last few weeks, China’s president, Xi Jinping, and other top Chinese leaders have also stepped up efforts to promote China as a globalization-friendly alternative to Trump’s protectionist stance. The power play is especially important this year. Xi is set to consolidate his authority at a Communist Party congress this fall.

The political support for free trade rhetoric is more divided in the U.S.

“Trump also needs to show he’s making things better for the American worker,” Shapiro said. “He’s also limited” in power due to the U.S. democratic system of checks and balances.

The challenge is if trade tensions escalate, Shapiro said, “the U.S. is going to be hurt anyways” from disruption to the supply chain. Many products sold in the U.S. are partly or wholly manufactured in China.

To be sure, it’s still unclear whether U.S-China tensions will heat up into a trade war that decimates one party over the other. China’s economy is by no means as advanced as that of the United States, but can increasingly hold its own while U.S. presidents come and go. Meanwhile, deep business relations between the two countries will be complicated to unravel.

“I don’t see trade as a zero-sum game where, if one country benefits the other loses,” said Ira Kalish, chief global economist at Deloitte. “Certainly both countries depend on one another substantially.”

Reliance on China growth to ease: Expert

Reliance on China growth to ease: Expert  Thursday, 26 Jan 2017 | 8:35 PM ET | 01:57

U.S. Eyes New Tactic to Press China

February 14, 2017

Currency strategy would avoid singling out country in bid to avoid break in relations

U.S. President Donald Trump committed to a longstanding agreement that the U.S. won’t recognize Taiwan diplomatically in a phone call with President Xi Jinping late Thursday.

U.S. President Donald Trump and China’s leader President Xi Jinping. PHOTO: JIM LO SCALZO/EUROPEAN PRESSPHOTO AGENCY


Feb. 13, 2017 8:02 p.m. ET

WASHINGTON—The White House is exploring a new tactic to discourage China from undervaluing its currency to boost exports, part of an evolving Trump administration strategy to challenge the practices of the U.S.’s largest trading partner while stepping back from direct confrontation.

Under the plan, the commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China, said people briefed on or involved in formulating the policy. U.S. companies would then be in a position to bring antisubsidy actions themselves to the U.S. Commerce Department against China or other countries.

The currency plans are part of a China strategy being assembled by the White House’s new National Trade Council, which seeks to balance the goals of challenging China while still keeping relations with the country on an even keel. To do that, measures taken against China would also apply to other nations.

The administration would avoid, at least for now, making confrontational claims about whether China is manipulating its currency for trade benefit, the people said.

The move could be a sign the Trump administration is softening its stance on China. During his presidential campaign, Donald Trump threatened to label China a currency manipulator on the first day of his administration, which he didn’t do. He also threatened to slap 45% tariffs on Chinese goods, an idea he hasn’t raised recently.

During a phone call with Chinese President Xi Jinping last week, President Trump backtracked on a threat involving the “One China” policy, which recognizes Beijing sovereignty over Taiwan. Mr. Trump said the U.S. would honor the “One China” policy , according to the White House, after he earlier threatened he might not do so unless China made big concessions on trade.

But the currency move, if put into effect, is bound to be controversial because it may violate World Trade Organization rules. Other countries are also sure to take similar measures against U.S. exports and could argue that Federal Reserve policies that weaken the dollar qualify as subsidies. The Obama administration, concerned about such consequences, decided against naming currency practices as a subsidy.

The individuals who have been briefed on the White House thinking stress that the currency plan and other changes need to be reviewed by cabinet officials including Steven Mnuchin who was confirmed as Treasury secretary late Monday and Commerce Department nominee Wilbur Ross Jr. who is awaiting confirmation.

A White House spokeswoman declined to comment. A representative for the Chinese embassy in Washington didn’t respond to requests for comment.

China’s currency practices have long been a source of controversy between the nations with the world’s two biggest economies. Twice a year, the Treasury issues a report examining whether countries pursue policies that keep their currencies undervalued. Designation as a currency manipulator is mostly symbolic. Still, it has long been seen in Beijing as a possible prelude to punitive measures, a threat that Mr. Trump made explicit in a late 2015 opinion piece in The Wall Street Journal .

The Treasury last labeled China a currency manipulator in 1994 during the Clinton administration.

A string of corporate executives have told the Trump White House that China no longer is pursuing an undervalued currency and has run through $1 trillion in foreign reserves trying to stem the yuan’s persistent decline.

In an interview with the Journal in January, Mr. Trump rejected that claim, saying Chinese leaders talk about supporting their currency “because they don’t want us to get angry.”

Currency manipulation is “not on top of agenda of the American business community in China,” said James McGregor, China chairman for APCO Worldwide, a communications and lobbying firm. Last week he visited the White House and other government offices as part of a delegation of U.S. business officials from China.

Categorizing currency manipulation as a subsidy would give U.S. companies a new measure to use in case China reverts to a more mercantilist approach. Companies routinely bring antisubsidy suits to the Commerce Department against imports which they argue are being improperly subsidized by foreign governments. If the U.S. firms prevail, Commerce often assesses heavy duties on those imports, which sharply limits imports.

“It’s a great first move,” said Dan DiMicco, former chief executive of steelmaker Nucor  Corp., who has been advising the Trump team on trade issues. “It allows companies to use trade laws to consider currency manipulation, which is rampant in the world, especially in China, as a subsidy.”

Prominent Democrats, including Senate Minority Leader Chuck Schumer of New York and Ohio’s Sherrod Brown , have long argued for previous administrations to make such a change.

The Trump administration is also looking to tighten oversight of foreign acquisitions of U.S. firms that have access to important technology. The Committee on Foreign Investment in the U.S., or CFIUS, an interagency committee that reviews foreign acquisitions, would get broader scope to reject deals that threaten national interests, said individuals involved in discussions with the White House.

The White House is also examining the creation of an additional panel to look more broadly at the transfer of U.S. technology overseas, whether by acquisition, license or joint venture, these people said.

U.S. companies routinely complain that Beijing insists that they create joint ventures with Chinese firms to get access to the vast Chinese market and to give their partners access to the latest technology.

Several individuals involved in the discussions said the new panel, dubbed “SAFE,” would operate as a “free-floating” intelligence-gathering operation and be staffed by people from economic and security agencies, plus outside experts. It’s unclear how the panel would interact with CFIUS and other agencies.

Beijing has traditionally counted on American corporations to blunt U.S. government policy offensives on the Chinese economy. But that support may be weakening. According to a survey last month by the American Chamber of Commerce in China, 81% of member companies feel that foreign businesses are less welcome in China.

“The American business community in China welcomes a pushback because China has overreached,” said Mr. McGregor, the APCO official. “But it has to be smart and well thought-out and focus on real issues between the two countries, such as techno-nationalism and the step-by-step closing of market access for foreign companies in China.”

Ian Talley contributed to this article.

Write to Bob Davis at


U.S., China Coordinated Policy Reversal

February 11, 2017

Trump pledges to honor longstanding policy not to recognize Taiwan diplomatically

U.S. President Donald Trump committed to a longstanding agreement that the U.S. won’t recognize Taiwan diplomatically in a phone call with President Xi Jinping late Thursday.

U.S. President Donald Trump committed to a longstanding agreement that the U.S. won’t recognize Taiwan diplomatically in a phone call with President Xi Jinping late Thursday.

Updated Feb. 10, 2017 7:12 p.m. ET

WASHINGTON—President Donald Trump’s decision to back down on his threat to overturn a cornerstone of U.S.-China relations was made before his call this week to counterpart Xi Jinping, part of a move toward continuity in Washington’s approach to Asia.

Mr. Trump and Mr. Xi weren’t five minutes into their phone call Thursday night when the issue of the new administration’s threat to tear up the longstanding U.S. agreement with China to withhold diplomatic recognition of Taiwan was put to rest, said a senior U.S. official.

“I would like you to uphold the ‘One China’ policy,” Mr. Xi said to Mr. Trump in a scripted exchange.

“At your request, I will do that,” replied Mr. Trump, the official said.

Mr. Trump had just come from dinner with Republican donor Sheldon Adelson, Secretary of State Rex Tillerson and Nicki Haley, the U.S. ambassador to the United Nations.

White House officials declined to specify what if anything Mr. Trump got out of relenting on the One China policy. China’s Foreign Ministry spokesman Lu Kang didn’t directly address a question about whether China had had to make any concessions in return.

For Mr. Trump, it marked a significant retreat, but also presented an opportunity to press ahead with negotiations on economic and security issues that will be critical to his administration’s policy in the region.

The two leaders went on to have a 45-minute discussion about issues ranging from trade to personal lives, spouses and families, the senior U.S. official said.

Donald Trump, in a phone call with his counterpart in Beijing on Thursday, affirmed the “One China Policy.” Before taking office, Trump threatened to upend this cornerstone of the U.S.-China relationship. WSJ’s Jason Bellini reports. Photo: Getty

“It really was an opportunity to make sure relations with China were reset,” the official said.

It was also an opportunity for Mr. Trump to speak in person with Mr. Xi. The White House team had worked for several days to arrange the call, which came weeks after Mr. Trump’s December conversation with the president of Taiwan, a call that broke with decades of protocol in which the U.S. has agreed not to recognize Taiwan diplomatically.

For Mr. Xi, the moment reflected how China’s wait-and-see approach to the new U.S. president paid off. Beijing had made clear to the Trump administration that U.S. adherence to the “One China” policy was an inviolable precondition for relations.

Beijing praised Mr. Trump’s shift on the One China policy. Mr. Xi expressed his appreciation during the call, according to the state-run Xinhua News agency. A senior U.S. official said Mr. Xi took time to praise Mr. Trump for his election victory, which the new president appreciated.

For Mr. Trump, it was part of a broader message to the region this week and came a day his White House meeting with Japanese Prime Minister Shinzo Abe on Friday.

After his Oval Office meeting with Mr. Abe, Mr. Trump at a news conference reassured Japan and other Asia-Pacific nations that he wouldn’t unravel decades of American foreign policy by scaling back the U.S. military presence in region. Allies feared he would do so after he questioned the buildup and suggested during his campaign that countries like Japan and South Korea may need to acquire nuclear weapons.

The most important thing is that Trump accepts the ‘One China’ policy, but that certainly doesn’t mean that his China policies are fully formed.

—Zhu Feng, a professor focusing on international relations at Nanjing University

“We are committed to the security of Japan and all areas under its administrative control and to further strengthening our very crucial alliance,” Mr. Trump said at a joint news conference with Mr. Abe. “The U.S.-Japan alliance is the cornerstone of peace and stability in the Pacific region.”

He said his conversation with Mr. Xi and close U.S. relations with China will benefit Japan.

“It was a very, very warm conversation. I think we are on the process of getting along very well,” Mr. Trump said of the phone call with Mr. Xi. “I believe that that will all work out very well for everybody, China, Japan, the United States and everybody in the region.”

Chinese analysts said Mr. Trump’s change in rhetoric was inevitable.

“Some things you don’t need to be anxious to respond with tits-and-tats for,” said Zhang Ruizhuang, professor of international relations at Nankai University in Tianjin. “Instead, give him some time, and let him slowly realize things on his own.”

Yet some observers were disappointed.

“I guess I always knew President Trump would eventually reaffirm our One China policy, but I was at least hoping for a more open, frank discussion on its origins and continued relevance before doing so,” said Sean King, an Asia specialist and senior vice president at consulting firm Park Strategies.

Mr. King said the turnaround would hurt Taiwanese President Tsai Ing-wen.

Mr. Trump’s call with Ms. Tsai had sparked both celebrations and anxiety in Taiwan, including fears that the island might become a chess piece in U.S.-Chinese relations. China has considered Taiwan a breakaway province since Chiang Kai-shek’s Nationalists set up a government there in 1949, after years of civil war.

Mr. Trump’s agreement to uphold the One China policy marks one in a series of stances toward Asia that he’s tempered since taking office. He had brushed off his call to Ms. Tsai as of little consequence, and vowed to use the One China policy as leverage in negotiations with China on contentious security and economic issues.

Mr. Trump also had threatened during his presidential campaign to slap a 45% trade tariff on Chinese goods and promised to declare China a currency manipulator on his first day in office.

But he backed off of that pledge, telling The Wall Street Journal in an interview before taking office last month that he wanted to speak with China first.

On Friday Mr. Trump promised there would soon be “a level playing field” on currency valuation when asked whether he would continue to press Chinese leaders about their past practice of devaluing their currency.

“That’s the only way that you can fairly compete in trade and other things,” Mr. Trump said, without elaborating.

A senior U.S. official said the issue came up in their phone call in the context of economic issues but was not a substantial point of discussion.

David Lampton, a professor at Johns Hopkins School of Advanced International Studies, said China might be willing to do a few things to try to move the relationship in a more positive direction, such as increase some pressure on North Korea over its nuclear threat or advance talks on a bilateral investment treaty.

“If I were China I would welcome the recent statement but I would not take it for granted,” he said. “This may open up the possibility for modest progress in other areas but over the long haul, this policy is subject to adjustment as the two countries interact.”

Eswar Prasad, a former China expert at the International Monetary Fund and a professor at Cornell University, said the move could have a salutary effect on U.S. businesses.

“This cools off the political as well as economic tensions, which are certainly tied together in this environment,” Mr. Prasad said.

In recent days, the Trump administration had sought to clarify its approach to Asia. Last week, U.S. Defense Secretary Jim Mattis paid visits to U.S. allies South Korea and Japan to reassure them that the U.S. plans to continue stationing troops in both countries, following suggestions by Mr. Trump that their presence—which serves as a bulwark against military incursions by Beijing and Pyongyang—was too costly for the U.S.

Similarly, prior to his confirmation as Mr. Trump’s secretary of state, Rex Tillerson walked back previous statements that the U.S. might block China’s access to islands it has built in the South China Sea, saying that the U.S. should be “capable” of limiting such access, should a contingency occur.

In written answers provided to the Senate, Mr. Tillerson also indicated he intended to adhere to the “One China” policy, saying Taiwan “should not be treated as a bargaining chip.”

Mr. Tillerson was on hand for Thursday’s call.

Write to Carol E. Lee at and Te-Ping Chen at


Trump, Japan’s Abe discuss concerns about trade, security at summit

February 10, 2017
By Steve Holland and Kiyoshi Takenaka | WASHINGTON — Reuters

President Donald Trump and Prime Minister Shinzo Abe opened two days of talks on Friday looking to cement a decades-old alliance between Japan and the United States that has been under strain because of the Republican’s positions on trade and security.

The two leaders sat down for talks in the Oval Office, shaking hands and smiling for photographers. Abe set a hopeful tone, telling a U.S. Chamber of Commerce breakfast that he wanted to build a relationship of trust with the new U.S. leader.

“I would like to clearly demonstrate the unshakable Japan-U.S. alliance to the world,” Abe said ahead of White House meetings.

Still, an air of uncertainty was hanging over their summit after a presidential campaign in which Trump slammed the U.S. treaty obligation to defend Japan and accused the Japanese of stealing American jobs.

Japanese Prime Minister Shinzo Abe and President Trump

Japanese Prime Minister Shinzo Abe and President Trump meet in the Oval Office on Feb. 10, 2017. (Photo: Brendan Smialowski, AFP/Getty Images)

After their conversations, Trump and Abe are to stage a joint news conference, have lunch and then fly to Palm Beach, Florida, on Friday afternoon for a weekend stay at Trump’s Mar-a-Lago resort.

The two will play golf at one or two of Trump’s golf courses in the area.

It will be the most time Trump will have spent with a foreign leader since taking power last month and his second face-to-face meeting with a key ally after talks with British Prime Minister Theresa May two weeks ago. Trump hosted Abe at Trump Tower last year in his first talks with a foreign leader after his surprise win in the November presidential election.

“I think the president just really enjoys his company and wants to not only get to know him better but to have a greater bilateral relationship,” White House spokesman Sean Spicer said. “He understands their importance in the region. He values his friendship and looks forward to deepening the relationship.”

The U.S. side took steps to get the two leaders off to a positive start by saying Trump would oppose any unilateral declarations that would undermine Japan’s administration of disputed islands in the East China Sea.

Japanese Prime Minister Shinzo Abe arrives to lay a wreath at the Tomb of the Unknown Solider at Arlington National Cemetery in Arlington, Virginia, U.S. February 10, 2017. REUTERS/Aaron P. Bernstein

There have been long-standing tensions between China and Japan over waters in the East China Sea, including islands known as the Senkaku in Japan and the Diaoyu in China.

Trump and Chinese President Xi Jinping held a phone call on Thursday night. Japanese spokesman Norio Maruyama called it a positive development.

“It’s good and positive in terms of peace and security of the region and the international community,” he told reporters.


A senior U.S. administration official said Trump was unlikely to raise with Abe his frequent charge that Japan manipulates currency markets to lower its currency. Trump has hurled the same accusation at China.

“I can tell you that’s not something that’s at the top of the list, but whether it comes up naturally in conversation, we’ll see over the course of that meeting,” said the official.

Japan has had lingering concerns about what Trump’s self-styled “America First” strategy means for U.S. foreign policy in Asia as well as what his decision to withdraw from the Trans-Pacific Partnership trade pact means for bilateral economic ties.

Abe hopes Japanese promises to help create U.S. jobs and bolster Japan’s military will persuade Trump to turn down the heat on economic matters and stand by the alliance.


Abe, who will be accompanied by Finance Minister Taro Aso and Foreign Minister Fumio Kishida, will bring a package of steps Tokyo says could create 700,000 U.S. jobs through private-public investment in infrastructure such as high-speed trains, Japanese government sources say.

Japanese officials have been soothed by security assurances from Defense Secretary Jim Mattis and others.

But they worry Trump may go off script, given his recent phone call with Australian Prime Minister Malcolm Turnbull. Leaks of that conversation showed Trump labeled a U.S.-Australian refugee swap deal as “dumb.”

“There are concerns about Trump in every allied capital since his awkward phone call recently with Prime Minister Malcolm Turnbull of Australia,” said a background paper about the meeting written by Asian experts at the Center for Strategic and International Studies.

“Rather than bring a list of concrete ‘asks,’ Abe will likely approach this meeting emphasizing how he aligns with Trump on many of his objectives,” the paper said.

To avoid questions about whether Japan is paying Trump for Abe to stay at the beachfront Mar-a-Lago retreat, the White House declared that the entire visit there, including golf, is the official gift for Abe from Trump.

It will be Trump’s first use of Mar-a-Lago for diplomacy.

(Additional reporting by Linda Sieg; Editing by Andrew Hay and Alistair Bell)


Trump commits to security of Japan


WASHINGTON — President Trump reaffirmed the United States’ commitment to the defense of Japan on Friday but said both countries need to contribute more to military cooperation.

“We will work together to promote our shared interests, of which we have many,” Trump said after a White House meeting with Japanese Prime Minister Shinzo Abe.

That includes regional threats from North Korea and Chinese expansion into the South China Sea, Trump and Abe said.

The president, who has criticized Japanese trade policies, also said he would pursue new deals with the U.S. ally that are “free, fair and reciprocal.”

For his part, Abe said he is already increasing defense spending by his country, and he pledged Japanese contributions to U.S. infrastructure programs.

“There will be even more jobs born in the United States,” Abe said.

During the joint news conference, Trump also:

  • Declined to specify how he would proceed in the wake of an appeals court decision against his proposed travel ban from seven Muslim countries. Options include a Supreme Court appeal or rewriting the travel order. “We are going to keep our country safe,” Trump said.
  • Said his administration will be able to block any terrorist attacks. “We will not allow that to happen,” he said.

Read more:

The main goal of the Trump-Abe meeting is “building personal trust between the two leaders,” said a Japanese statement before the summit, and to bolster the historic U.S.-Japan alliance that is “the cornerstone of peace and prosperity in the Asia-Pacific region.”

Unlike previous presidents, Trump greeted his international guest at the door of the West Wing, a job that used to be done by a protocol officer. Trump extended the same courtesy to his first foreign visitor, British Prime Minister Theresa May.

Trump has set aside two days for chats with Abe. After the Oval Office meeting, working lunch and news conference at the White House, Abe and Trump will travel on Air Force One to the president’s Mar-a-Lago estate in Palm Beach, Fla. The two leaders are scheduled to play a round of golf on Saturday.

Japanese Prime Minister Shinzo Abe met with US President Donald Trump a the White House Friday; their first visit since Trump took office. The meeting offers a chance to shore up a long-standing security alliance and repair economic ties. (Feb. 10) AP


Abe, who also met with Trump in New York City shortly after the November election, told reporters before leaving Tokyo, “I want to hold a summit that can send a message saying the Japan-U.S. alliance will strengthen further with President Trump.”

The meeting takes place less than a month after Trump formally announced he would not pursue ratification of the proposed Trans-Pacific Partnership, a 12-nation trade deal in which Japan would have been a key player. Instead, Abe is expected to begin talks about revising bilateral trade agreements between the United States and Japan, and to commit to Japanese investments in the U.S. economy.

“We will develop the two countries’ economies even more based on free and fair rules,” Abe told reporters.

In his presidential campaign, Trump also complained about what he-called “one-sided” deals in which the United States supplies troops and general defense assistance to allies, but bear a disproportionate share of the costs.

Candidate Trump often singled out Japan. Told once that the Japanese pay at least half the costs, Trump said: “Why don’t they pay 100%?”

That said, Trump was expected to echo Defense Secretary Jim Mattis, who during a visit to Japan last week reaffirmed the U.S. commitment to mutual defense.

In Japan, Abe has proposed increased defense spending in the face of critics who cite the demilitarization of the country after its defeat in World War II.

The Abe-Trump meeting takes place the morning after the White House announced that Trump had spoken with the leader of another Asia power: China.