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Alicia García-Herrero

A. G.-H.

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Articles by A. G.-H.

China’s Coronavirus will not lead to recession but to stimulus and even more debt

12 days ago

The coronavirus outbreak will not lead to recession but the costs of ensuring growth targets will be highThe outbreak of coronavirus has struck yet another blow to the Chinese economy after the improvement in business confidence since the Phase One trade deal was announced in mid-December. How severe the coronavirus may be for the Chinese economy will not only depend on the extent and depth of the virus outbreak but also on the government response. The People’s Bank of China immediate and bold reaction to calm markets with the equivalent of USD 170 billion in liquidity injection says it all about the pressure for Chinese policymakers to mitigate the impact of the coronavirus outbreak on financial markets, on sentiment and on the Chinese economy, more generally.Many take the example of the

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From globalization to deglobalization: Zooming into trade

15 days ago

External PublicationThis article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. By: Alicia García-Herrero Date: February 3, 2020 Topic: Global Economics & Governance After decades of increasing globalization both in trade, capital flows but even people to people movements, it seems the trend has turned towards deglobalization. This article shows some evidence of the decrease in merchandise, capital and, to a lesser extent people to people flows. In addition, zooming into trade, the article offers an account of the importance of the strategic competition between the US and China to foster the deglobalization trend further. This is true for trade but even beyond in the tech and finance space. Finally, the demise of the

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The US-China trade agreement will not put an end to geopolitical risks

18 days ago

The agreement between the US and China should not be read so positively in Europe, especially in GermanyThe reading of the global financial markets on the agreement reached between the United States and China has been positive, probably excessively, given the relatively limited size of the agreement reached. The best thing about the agreement is that it allows a truce – at least partial – in the strategic competition between China and the United States. This truce comes at a key moment for both presidents, Trump and Xi, for different reasons. Trump needs a victory while calming the financial markets before the US presidential election. Xi needs to improve investors’ perception of China’s economic situation to achieve growth of at least 5.7% in 2020 and, thanks to that, achieve its

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Japanese economy: Déjà vu – but worse

December 12, 2019

It is difficult to imagine how Japan can undertake any major economic reform if it has taken five years to increase the consumption tax and has needed two strong fiscal packages.Since Prime Minister Shinzo Abe came to power in 2012, Japan’s economic recovery has been hinging on his three key economic policies (the so-called three “arrows” of Abenomics) bearing fruit. The first, and best known, arrow is monetary policy, which has been used massively through quantitative easing as well as the introduction of negative rates, but to no avail. In fact, the Bank of Japan’s ultimate objective – pushing up inflation toward a 2% target – is far from being reached.On the second “arrow,” namely fiscal consolidation for a country with one of the highest levels of public debt in the world, the

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Watch out for China’s currency in case of no-deal scenario

December 11, 2019

The U.S. and China’s negotiations on a phase-one deal seem to have stalled again. The market was already aware of the limited nature of the likely deal, but was still hoping for it. Against this backdrop, the investors have reacted negatively to the increased likelihood of not reaching a deal on December 15. If this is the case, the U.S. will apply additional tariffs on Chinese imports. The obvious question to address, thus, is, what can happen to China under such a scenario?We first need to realize that the so-called interim deal would still have left all the tough aspects, i.e. intellectual property protection, industrial policy subsidies, the role of SOEs, market access, etc., to a later stage. Given that the market has already lowered its expectations, a no-deal scenario might not be

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Hong Kong’s Economy is in Danger of Further Contraction

November 21, 2019

Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.While the former two external risks are not in the hands of Hong Kong and are subject to global development, the escalated social unrest and the lack of fiscal stimulus are bringing a higher downside risk to economic growth (Chart 1).Housing Is a Critical IssueFrom the priorities chosen, the Hong Kong government concluded that housing and land support are the most urgent issues to be tackled in the short run. However, there is still a lack of creativity and

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Why investors should temper optimism over a China trade rally

November 6, 2019

The economy is in worse shape than in 2015 and policies to boost growth are not as effective as they once wereTuesday’s rally in the renminbi was triggered by positive noises coming from the White House, raising hopes that the US may open the door to a trade deal with China, perhaps within weeks. The market moves saw the Chinese currency at one point strengthening past the seven-per-dollar mark.But investor optimism should be tempered. The world’s second-biggest economy remains in a tight spot. Compared with its previous slowdown in 2015, the Chinese economy is in worse shape today. The policies implemented to boost growth are proving less effective.If a trade deal does not happen, investors should be alert to another competitive depreciation of the renminbi — and a negative reaction in

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HK, Taiwan divergence result of economic policies

November 5, 2019

While the effect of the ongoing unrest on the Hong Kong economy is obvious, Taiwan was already doing better before the protests started.Hong Kong and Taiwan published their third-quarter growth figures very close in time, but the results were far apart.The two share the same global risks insofar as both are open economies affected by the US-China trade war and are heavily dependent on the mainland, whose economy is slowing down. And yet, while both economies grew at the same speed (2.9%), it was in opposite directions: Taiwan positively and Hong Kong negatively.It goes without saying that the Hong Kong economy has been bogged down by social unrest since mid-June, which explains the fast deterioration, but it is also true that both economies were already diverging before the social unrest

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Bolsonaro’s pilgrimage to Beijing

October 29, 2019

A strategic alliance between Brazil and China could be music to the ears for both leaders, but Bolsonaro does not want to look like one more vassal. Xi Jinping might need to think of a more exclusive offer to the President of the largest economy in Latin America.In his first official visit to China, Brazil’s President Bolsonaro will need to change his aggressive tone on China during his election campaign last year. In fact, from the mantra he kept them that “China wants to buy Brazil”, Bolsonaro may need to add a little but relevant twist, namely “I would be so pleased if China were interested in buying Brazil”. The reason for Bolsonaro’s pilgrimage to Beijing is simple: Brazil’s massive public sector, with an increasing need for funding, continues to crowd out the private sector, pushing

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The tricky link between the Hong Kong dollar and capital flows

September 13, 2019

The Hong Kong economy has been hit by a series of shocks, but it should resist taking drastic measures to keep foreign capital in the city.Hong Kong is a very special financial centre. First, it is highly dependent on Chinese financial intermediaries and corporates. Second, its currency is pegged to the US dollar through one of the tightest monetary arrangements, namely a currency board.Furthermore, Hong Kong’s economic cycle is mainly linked to mainland China but with both the Hong Kong dollar and interest rates governing the use of the currency following the US Federal Reserve. This means that as long as Hong Kong’s economy is doing well, the value of the HKD (that is, the US dollar under the peg) and the level of interest rates are not too much of a problem. If anything, a booming

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Last Tango In Biarritz: The End Of The G7?

August 28, 2019

The seemingly omnipotent G7, the meeting of the seven largest developed economies in the world, is weakening continuously and, as the author suggests, this should worry us all.The meeting of the seven largest developed economies in the world, the seemingly omnipotent G7, just concluded proceedings in Biarritz under the French presidency. Notwithstanding Emmanuel Macron’s attempt to climb the ranks of world leadership, the reality is that not much has been achieved at this summit, if at all.  In fact, although Macron has pushed Trump to discuss the matter of Iran, the reality is that not much has changed. In the same vein, Trump has not even bothered to seek the support of his main allies in his crusade against China’s economic policies, but rather quite the contrary. In fact, while G7

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Is this really a currency war or just a tantrum?

August 28, 2019

Since the People’s Bank of China (PBOC) allowed the yuan to surpass the dreaded level of 7 to the dollar on August 11, rivers of ink have flowed citing a new matter of contention between the U.S. and China, namely using currencies to gain competitiveness or, more simply, a "currency war."Previous versions of this opinion piece were published by Forbes and El PaisTo describe the events as a currency war may seem logical because another type of “war” between the U.S. and China, namely the trade war, has been on everybody’s mind for the past year and a half. Moreover, the Trump administration itself has continued this game by classifying China as a “manipulator” of its currency immediately after this latest devaluation.In the same way as the U.S. Treasury is not following its own script when

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A reflection on the Mercosur agreement

July 26, 2019

The EU accepts the deal because it is worried about the catastrophic scenario of a world without the WTO.

Just as Jean-Claude Juncker is leaving his post as President of the European Commission, and after 20 years of waiting, the European Union has signed a free trade agreement with Mercosur – the so-called single market, which is far from it given the recurrent differences in the economic policies of its Member States, especially between Argentina and Brazil but also of the smaller Paraguay and Uruguay.
Despite the large imperfections of this single market, its size – whether in population, with 260 million inhabitants, or in gross domestic product, of some EUR 2.2 billion – makes it undoubtedly of interest to the EU. This is because old Europe is increasingly dependent on other

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Too crowded bets on “7” for USDCNY could be dangerous

June 6, 2019

The Chinese yuan has been under pressure in recent days due to the slowing economy and, more importantly, the escalating trade war with the US. While the Peoples Bank of China has never said it will safeguard the dollar-yuan exchange rate against any particular level, many analysts have treated ‘7’ as a magic number and heated debates have begun over whether the number is unbreakable.

Chinese yuan has been under pressure in recent weeks due to the double dip in recent economic data and more importantly, the escalating trade war with the US. Since then, the CNY has shown weakness against USD, breaking 6.9 versus the USD, but also against major global currencies. The looming prospect of the China-US relationship, as well as a likely continued lax monetary policy in China, has all

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Expect a U-shape for China’s current account

May 28, 2019

As the US aims to reduce it’s bilateral trade deficit, China’s current-account surplus is back in the headlines. However, in reality China’s current-account surplus has significantly dropped since the 2007-08 global financial crisis. In this opinion piece, Alicia García-Herrero discusses whether we should expect a structural deficit or a renewed surplus for China’s current-account.

This opinion piece was first published in Asia Times.

China’s current-account surplus is back in the spotlight amid the US quest to reduce its bilateral trade deficit with the Asian country. However, the reality is that China’s current-account surplus has dropped significantly from its peak during the 2007-08 global financial crisis.
From China’s perspective, a narrower current-account balance may be

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Trade war: Is the U.S. panicking due to China’s big hedge?

May 9, 2019

U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs if no deal is reached. U.S. is in desperate need for a comprehensive victory, and China is ready to make concessions, but not to the extent of transforming its state-led economic model into a market-based economy.

This opinion piece was also published on Forbes

After several months of relative calm, the U.S.-China trade war has suddenly taken centre stage following Donald Trump’s unexpected announcement to ramp up tariffs from 10% to 25% on Friday if no deal is reached before then. Fear of uncertainty spread quickly among investors, sending global markets tumbling over the past few days.
So far, the market’s reading of Trump’s latest action has been ambiguous.

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What else China can do to support growth in the short term

April 23, 2019

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.

This opinion piece was originally published in The Corner.

Recent data shows the downward spiral in the Chinese economy has somewhat eased on a cyclical basis, but it is still too early to cheer for a full stabilization.
Beyond the fiscal and monetary stimuli announced during the two sessions of the 19th National People’s Congress in March 2019, the question is what else China can do to support growth in the short term.
Out of the key reasons for the cyclical slowdown in 2018, namely the worsening sentiment due to the US-China trade war and the rapid shadow banking crackdown, the former can be considered as an external

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Europe in the midst of China-US strategic competition: What are the European Union’s options?

April 8, 2019

With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question: how to position itself in the competition.

With the trade conflict between the United States and China bringing China-US strategic competition into the open, the European Union faces an urgent question: how to position itself in the competition. This paper reviews the impact of the US-led trade war against China and its immediate consequences for China, the US and the EU. Although protectionism can never be growth enhancing, European companies could see gains if the trade confrontation between China and the US ends up reducing their bilateral trade to the benefit of European companies that export to China. This is because

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China’s debt is still piling up – and the pile-up is getting faster

March 19, 2019

With looser monetary policy, China’s policymakers hope to encourage banks to lend more to the private sector. This seems to imply a change from the deleveraging drive begun in mid-2017. Although this should be good news for China’s growth in the short term, such a continued accumulation of debt cannot but imply deflationary pressures and a lower potential growth further down the road.

This article was published by Brink.

If you think China’s monetary policy became more lax in 2018, wait for 2019. Pushed by gloomier activity data, China’s policymakers have moved from an orthodox monetary policy to a much more heterodox one.
The core of this more aggressive move is to exhort banks to lend more to the private sector, with specific targets on the amount of credit granted to private

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China’s strategy: Growth, alliances, and tech acquisition

February 27, 2019

Despite the pause in the US-China trade war, the US and China are strategic competitors, and will continue to be so for the foreseeable future. China realizes that there is little room to settle long-term disputes and, as a result has shifted towards a strategy that focuses on sustaining growth at any cost, expanding alliances, and advancing its technology.

The truce agreed to by China and the US at the sidelines of the G20 meeting in Buenos Aires does not change the US’ ultimate goal to contain China. The reason is straightforward: the US and China have become strategic competitors and will continue to be so for the foreseeable future, leaving little room to settle any long-term disputes. China’s recognition of the structural features of the US-led trade war has also brought about a

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Lose-lose scenario for Europe from ongoing China-US negotiations

January 9, 2019

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

This opinion piece was originally published in The Corner.

While there is no clear winner from the US-China trade tensions, the way in which the negotiations between the US and China are shaping up does not bode well for the European Union (EU). If China were finally to massively increase its imports from the US to buy back its future, it needs to substitute imports from other parts of the world, leaving missed opportunities borne by US allies, especially the European Union. Further, should China offer the concession that the US has requested in terms of banning import tariffs for some

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China’s view of the trade war has changed—and so has its strategy

December 19, 2018

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

This opinion piece has been published in Brink

Thinking Strategically, Not Tactically
China’s recognition of the much more structural features of the U.S.-led trade war has also brought about a drastic change in its response to the U.S.
China has shifted from a tit-for-tat tactic based on retaliatory measures on trade to a three-pole strategy: sustaining domestic growth at any cost,

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Global markets’ tepid reaction to China’s new opening

October 11, 2018

China’s accession to the World Trade Organisation in 2001 was greeted with great fanfare. But near silence has greeted the recent removal by the China Banking and Insurance Regulatory Commission of caps on foreign ownership of Chinese financial institutions. For Beijing, the apparent lack of interest might be an issue of too little, too late.

Soon after U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, met in Beijing last year, China announced that it would relax or eliminate foreign ownership limits in commercial banking, securities, futures, asset management, and insurance.
After an initial bout of media coverage, the subsequent reaction has been muted: no stock market reaction (certainly not positive) and a distinct lack of enthusiasm from foreign financial

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Ten years after the crisis: The West’s failure pushing China towards state capitalism

October 10, 2018

When considering China’s renewed state capitalism, we should be mindful of the damage done by the 2008 financial crisis to the world’s perception of Western capitalism.

This article was first published by Le Soir.

The 2008 financial crisis radically changed the world’s image of Western capitalism for the worse. Apart from the massive cost of rescue packages offered to financial institutions in the US and Europe and the severe recession that followed, something even more important was lost due to the crisis – namely, the trust in capitalism as an economic model.
Following Lehman’s default, a drastic collapse in confidence spread like fire from one country to another. Investors lost confidence in the value of their assets to the point of not even relying on the ability of central

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Japan must boost R&D to keep rising Chinese rivals at bay

September 20, 2018

As China shifts into a more advanced industrialised economy, Japan has slowly but surely lost to some of its comparative advantages to its rival. One possible solution to help the government keep pace would be to concentrate research and development efforts on a few key sectors where Japanese players still hold a large competitive lead.
Alicia García-Herrero
Date: September 20, 2018
Topic: Innovation & Competition Policy

China’s shift into more advanced industrial exports is increasingly transforming what used to be a complementary trade relationship with Japan into a primarily competitive one.
Previously, Japan exported large amounts of machinery to China, a good part of which went into factories set up by Japanese

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China real estate developers: a grey rhino in the jungle of financial risks

September 18, 2018

The author assesses the Chinese real estate industry’s liquidity concerns and its leverage, which is estimated to be four times higher than its global peers.

Apart from the much-discussed trade war, the difficult financial situation of real estate developers is probably the most obvious grey rhino of the Chinese economy. While the risks have certainly been latent for quite some time, investors seem to have overlooked them.
The recent deleveraging campaign has somewhat controlled leverage in state-owned enterprises but unfortunately not yet in China’s highly leveraged private sector, of which real estate developers are the lion share. The question, though, is whether Chinese developers can handle the pressure of tougher financial conditions as loans may not be directed into the sector

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US-China trade war: What’s in it for Europe?

August 23, 2018

To help evaluate whether the market response is warranted or exaggerated, the author measured the trade impact of additional import tariffs based on standard economic theory, namely two key parameters—the tariff pass-through rate and the price elasticity of demand. The end of multilateralism seems clear, at least for trade.
Alicia García-Herrero
Date: August 23, 2018
Topic: European Macroeconomics & Governance

This opinion piece was also published in BRINK

When the US kicked off 2018 by imposing tariffs on solar panels and washing machines, it was not expected the trade disputes would escalate into a full-fledged war. However, such optimistic sentiments in the market have dissipated since mid-June.
The escalation of

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US Tariffs Aim to Contain China’s Technological Rise

April 10, 2018

While tension increases with each of the imports listed under the new tariffs, it now seems clear that the US are trying to slow down China’s technological advances. Though such a protectionist attitude represents an obstacle, China should consider it an opportunity to strengthen relations with its Asian neighbours and the EU.

This opinion piece has been published in Caixin

Beijing’s attempts to calm down a furious U.S. administration (with promises of opening up sectors and a stronger yuan) do not seem to have convinced the White House to tone down its protectionist actions against China. Following two rounds of import tariff hikes earlier this year, the U.S. announced a 25% hike in import tariffs on 1,333 products exported from China to the U.S. at an estimated value of $60

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What Are the Targets in the US–China Trade War?

April 10, 2018

Following the US announcement of new, high tariffs on imports, China is answering the Trump administration by applying its own series of tariffs. In this article, the author identifies the list of products that each country will be targeting, going beyond purely trade issues as each attempts to weaken the other.

This opinion piece has been published in Brink

The U.S.–China trade war is escalating faster than expected, but the real question is: What are the ultimate targets for the two countries? To answer this question, we analyzed the 1,333 products covered by the U.S.’s latest action against China’s breach of intellectual property rights and classified them based on two criteria: the technological content and the weight in China’s total exports to the U.S. We then applied the

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Will U.S. tax reform lure U.S. companies away from China?

March 26, 2018

What will be the results of the changes to the U.S. tax system in China? Will the new U.S. corporate tax rate cause Chinese firms to shift their operations to the U.S. to enjoy the new tax benefits? Read Alicia García-Herrero’s opinion on President Donald Trump’s tax reform.

The changes to the U.S. tax system have created heated debate in China. Many fear that the reduction in the U.S. corporate tax rate may cause Chinese firms, or at least U.S. companies operating in China, to shift their operations to the U.S. to enjoy the new tax benefits.
However, this is highly unlikely for a number of reasons.
Firstly, the Chinese government still controls the behavior of Chinese corporates, especially as far as their offshore actions are concerned, as is clearly indicated by the increasingly

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