Barely seven months ago Donald Trump was in China on an all-singing state visit, during which two key priorities emerged. The first — his concern with North Korea’s nuclear threat and his keenness that Chinese president Xi Jinping should help defuse it — has all but evaporated after the US-North Korea peace summit a fortnight ago.
The second — the US-China trade deficit — was outlined in emollient language last November. Yet, over recent weeks, the US president has rechannelled his protectionist aggression, announcing a total of $253bn of tariffs on Chinese goods, sparking retaliatory measures from Beijing. Two-way tariffs covering steel, aluminium and some agricultural goods have already been introduced.
Sunday’s announcement by the People’s Bank of China that it would release more than $100bn of commercial bank reserves as an economic stimulus has been presented largely as a response to the trade spat. But it has a far broader back-story — and far more profound implications, both for China’s vast finance sector, and for Wall Street.
This is just the latest reserve cut. The last one was in April, and is part of an effort to mitigate the impact of a regulatory crackdown on banks.
Financial sector risk has clearly been at the top of the Chinese government agenda for the past year. New limitations on the creation of banks’ off-balance sheet wealth management products translated into a sharp decline in the volume of interbank funding, down 10 per cent in the first five months of the year. The reserve release — essentially freeing up years of excess deposit accumulation — will ease the squeeze on bank funding. But it will be crucial to monitor how the funds are deployed. Andrew Polk at Trivium, a Beijing-based advisory firm, sees the initiative as “a painkiller, not a steroid”.
At last November’s Trump-Xi summit, there was much excitement among foreign financial services groups when it emerged that banks and insurance companies would be freed up to buy out local joint venture partners — a landmark reform. For Goldman and JPMorgan, among the groups seeking to exploit the liberalisation, the US president has just proved yet again that what Mr Trump giveth, Mr Trump taketh away.
