There have been several developments in China that may have been overshadowed by the US election, which itself is a mixed blessing for China. Trade and currency issues will likely prove more contentious. However, to the extent that a Trump Administration may pull back from its global engagement and leadership, there may be less confrontation over human rights and freedom of the press.
In terms of China's politics, an important development has to do with the age limit on Politburo members, which has been in place since former President Zemin first articulated it in 2002. This is important because next year, the key seven-member Standing Committee begins a new term. The "seven up, eight down" principle, which means someone 67 years old can be promoted but at the end of their term if they are 68 they must step down, could see five of the seven members replaced (all but President Xi and Premier Li).
It's also important as a precedent for Xi himself, who was recently recognized as "core" leader, something not achieved since Deng Xiaoping. President Xi is widely understood to be consolidating power to a great extent. The softer age limit would potentially see Xi stay longer. Currently, it is not unusual in China for leaders to wield influence even after they leave office.
Ahead of next year's National People's Congress, China's legislature, there are various ministerial changes. Among these, Finance Minister Lou Jiwei has been replaced. He was widely respected and no new position for him was announced. His replacement is Xiao Jie, who previously worked with Premier Li. Xiao Jie reportedly will focus on three large issues: relations with the US, broadening local government revenue bases and the real estate market. Xiao recommended increasing property taxes before in 2013. This may come back to the fore.
China has also gotten involved in Hong Kong politics. The proximate issue is that two newly elected HK legislators refused to take a loyalty oath. China argues this prohibits them from serving. The two elected legislators advocated HK independence, which conflicts with the loyalty oath.
Earlier Wednesday, China reported inflation figures. October CPI was in line with expectations at 2.1%. It is the highest since April. The main culprit is food prices. They are up 3.7% year-over-year. Non-food prices are up 1.7%. Another way to slice the data is to separate goods from services. Goods prices are up 1.9%, while service prices were up 2.5%.
Perhaps more importantly, producer prices are rising. In September they stopped falling for the first time since Q1 12, posting a slight 0.1% increase. In October, producer prices were 1.2% above year-ago levels. The market had expected a smaller rise. An interesting takeaway from the higher PPI is that it will likely boost nominal GDP in coming quarters. More broadly, China joins the US, UK and many countries in continental Europe that have seen deflationary forces ebb.
On Tuesday China reported its October trade balance. The surplus rose to $49.1 bln from $42 bln in September. However, exports fell for the seventh consecutive month. The 7.3% decline was larger than expected but less than the 10% fall in September. Imports fell 1.4%. This was also more than expected, but a slower pace from September (-1.9%).
The US-China bilateral deficit may become more politicized in the period ahead. Exports to the US fell 5.6% year-over-year in October. This means that the year-to-date US trade deficit with China, by their reckoning, is $208 bln compared with $218 bln in the same 2015 period. Note that last week's US trade figures showed the US had a $258 bln deficit with China this year, down from $275 bln from the year-ago period.
One sector that has been the source of much trade friction is steel. China's steel exports for the third month on a year-over-year basis were off 15% in October to 7.7 mln tons. Steel exports were off 22% in September and 7.4% in August. However, the surge at the start of the year means that China still increased its steel exports in the Jan.-Oct. period for the same year-ago period (0.7% to 92.74 mln tons).
Some part of the slowing of steel's export growth is the replenishing of domestic inventories. The property boom and infrastructure spending, which has supplanted monetary policy as the key form of stimulus, places a demand on steel as well. Crude oil imports slipped from September's record. Copper imports fell to their lowest level since February 2015. The drop in copper imports seems to reflect "import substitution" as domestic output is rising with new smelters coming online.
The yuan has fallen 4.4% this year and is now at its lowest level in six years. Given the appreciation of the greenback since Asia closed, it seems reasonable to expect further dollar rises. The currency is likely to be a flashpoint for the Trump Administration. As a candidate, Trump claimed that China is a currency-market manipulator. Many expect him to make this an official assessment early in his term. The Treasury Department, following Congressional legislation, has devised a framework with quantitative measures to better define manipulation. We have shied away from claims of a currency war, but this too can change.