Central Banks

How Trump could already be affecting monetary policy in China

Why China doesn’t want to look like a currency manipulator
Why China doesn’t want to look like a currency manipulator

Chinese officials might be trying to drain liquidity from their economy but the central bank remains fearful of raising interest rates too quickly, according to one strategist who suggests President Donald Trump might be indirectly influencing policy in the country.

"What is China trying to do about (large outflows)? Yes, they put up interest rates, they're draining liquidity, but still they don't seem to be really trying to stem the loan growth," Jane Foley, senior forex strategist at Rabobank, told CNBC Wednesday.

"We know that they've got several issues, we know that they are trying to perhaps drain the liquidity, but they don't want to take action. They don't want to put up interest rates too much because I think they appear to be fearful that that could slow growth. With respect to Donald Trump, I think part of the reason they are still trying to have this two-way trade in the exchange rate is to give this impression that they are not a currency manipulator, they are of course trying to stop the rate of movement," she added.

Data released Tuesday showed China's foreign exchange reserves dropped more than expected in January, to below the $3 trillion threshold for the first time in almost six years. Such figures have raised concerns among analysts that continued outflows will prompt the Chinese authorities to devalue their currency. Foley noted the data also showed a continued rise in loan growth in the world's second-largest economy, which she said could mean this cash was making its way out of the country.

President Donald Trump attends the National Prayer Breakfast in Washington, U.S., February 2, 2017.
Carlos Barria | Reuters

Meanwhile, the global debate on currency manipulation has seen a resurgence with the presence of the new U.S. president in politics. His trade adviser has recently blamed Germany for benefiting from a weak euro and Trump himself has previously criticized Japan and China for having a weak exchange rate.

"It's been a while, certainly not since he has been the president, certainly not since the election has (Trump) called China a currency manipulator and I think Donald Trump is perhaps aware of the fact that they are taking action to keep the exchange rate higher not lower," Foley told CNBC.

Foley predicted that China, its loan growth and its monetary policy, could be the next unexpected "black swan" event in finance this year. "We've known Greece is at risk, coming back to the headlines right now, but China is so much of a larger economy. That is the one that can certainly do a lot more damage to global confidence," she added.