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US Hints at China Truce, Beijing Welcomes Move

Rising financial vulnerabilities, increasing trade and geopolitical tensions, and historically high global debt threaten global growth prospects
China has announced plans to gradually remove foreign ownership caps for limits for car, ship and aircraft makers.China has announced plans to gradually remove foreign ownership caps for limits for car, ship and aircraft makers.

US Treasury Secretary Steven Mnuchin said he’s considering a trip to China amid a trade dispute with Beijing that finance chiefs warn could derail the global economic upswing. Mnuchin said he’s “cautiously optimistic” of reaching an agreement with China that bridges their differences over trade.

China on Sunday said it welcomed plans by top US officials to visit the country to discuss trade and economic issues, amid tensions between the world’s two largest economies, news outlets reported.

“The Chinese side has received information that the US side hopes to come to Beijing to discuss economic and trade issues. China welcomes this,” a short statement on the commerce ministry’s website said.

Tensions have been escalating as US President Donald Trump accuses China of unfair trade and presses for a reduction in the US’s $375 billion trade deficit with the Asian nation. The president is threatening to impose tariffs on as much as $150 billion on Chinese imports to punish the nation for alleged intellectual property theft. If the US follows through, China has vowed to impose retaliatory tariffs on everything from American airplanes to soybeans.

“A trip is under consideration,” Mnuchin told reporters on Saturday in Washington at the IMF’s spring meetings. “I’m not going to make a comment on timing, nor do I have anything confirmed.”

A visit by the treasury secretary to China could signal a breakthrough in the spat between the world’s two-biggest economies, whose threats to slap tariffs on each other have rattled markets and raised fears of a trade war. It would come at a sensitive time for the region’s geopolitics, with negotiations under way on a planned meeting between President Donald Trump and North Korean leader Kim Jong-Un.

Mnuchin’s remarks came as finance ministers and central bankers at the IMF Spring Meeting gave their latest economic assessments, often citing trade as a threat looming over the strongest upswing in seven years.

Global growth has strengthened and is increasingly broad based, the IMF’s main advisory committee said Saturday. However, it noted that “rising financial vulnerabilities, increasing trade and geopolitical tensions, and historically high global debt threaten global growth prospects.”

Good But Risky

IMF first deputy managing director, David Lipton, summed up the main takeaway he heard from officials at the meetings this week as “times are good but it’s getting risky,” Bloomberg reported.

Mnuchin said he met with Yi Gang, governor of the People’s Bank of China, at the IMF gathering this week. The discussions focused on issues related to the Chinese central bank, not trade, said the secretary. Mnuchin said they also discussed China’s planned further opening of some markets, a move that US has encouraged and “appreciated”.

“China will vigorously push forward the reform and opening-up of the financial sector, significantly relax market access restrictions, create a more attractive investment environment, strengthen the protection of intellectual properties and actively expand imports,” Yi said in a statement on Saturday. China has announced plans to gradually remove foreign ownership caps for limits for car, ship and aircraft makers.

Fears of Tit-for-Tat Tariffs

Should Mnuchin’s optimism fizzle, central bank chiefs may be left grappling with the stagflationary blow from tit-for-tat tariffs that push up inflation in the short-term as higher duties lift import prices and the drag on economic activity from the blow to confidence. That would suggest a need to keep monetary policy looser for longer.

“You have the direct effect on prices, of imposing tariffs, but you have the recessionary forces that will always generate significant downward bias in prices,” Alejandro Werner, head of the IMF’s Western Hemisphere department, said in an interview. “You would expect, if anything, looser monetary policy than in the base line.”

Central bankers echoed that concern at a time when the IMF is forecasting global growth of 3.9% this year and next, which would be the fastest pace since 2011.

A spiral of protectionism “would have a very big impact on growth,” Colombia’s central bank president Juan Jose Echavarria said in an interview in Washington. “It would be catastrophic for global growth. What we learned from the 1930s is that when all the countries start raising tariffs, economies stagnate.”

Tightening Trend

So far, trade risk alone hasn’t been enough to stop the turn of the global policy tightening cycle. The US Federal Reserve is set to hike its benchmark interest rate again by June and trade-reliant Singapore, which uses its exchange rate as its main policy tool, tightened the screws this month.

It could be that central banks keep tightening even amid talk of a trade war, said Rob Subbaraman, head of emerging markets economics at Nomura Holdings Inc. in Singapore. He warned investors against the “illusion” of a “monetary policy put”—assuming trade risks are a reason to maintain accommodative policy.

Protectionism “will be very undesirable as the global trade and economy are finally expanding in a stable manner,” said Bank of Japan Governor Haruhiko Kuroda, who is forecast to leave policy unchanged. “We have to be very cautious.”

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