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Alicia García-Herrero

A. G.-H.

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Articles by A. G.-H.

A reflection on the Mercosur agreement

23 days ago

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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Reading The Tea Leaves on China’s Constitutional Amendments

March 12, 2018

The recent amendments of the Chinese Constitution has stimulated much attention, focusing on the power consolidation of the President Xi. Despite the four key amendments do not mention direct economic reforms, indirect impact should be consider even if clear-cut conclusions are difficult to draw.

This opinion piece has been published in:

China’s structural issues, led by aging and the sharp reduction of the return on investment, have made economic reform more urgent than ever. Aware of this, only a few months ago, at Davos, China’s new economic mastermind, Liu He, offered a very rosy picture of the extent of economic reform we should be expecting from China in 2018. On that positive tone, China watchers were looking for signals of economic reform at the recent Central Committee

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China Fails to Woo U.S. With Financial Sector Opening

January 5, 2018

China’s recent announcement of reforming its financial market has received little enthusiasm from the U.S. despite its potential benefits. The lack of a clear agenda regarding its economic rival has pushed the Trump administration to minor any significant progress of China’s reform, and to maintain focus on strategic issues.

This opinion piece has been published by Brink News

Now that the dust has settled, one thing is clear: President Donald Trump’s visit to Asia in November served as a milestone in the increasingly rapid transfer of power from the U.S. to China. President Xi Jinping’s enthronement during the 19th Party Congress as China’s leader for the foreseeable future did most of the work, but Mr. Trump helped by failing to advance a clear agenda articulating the U.S.’s key

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South Korea needs to watch the BOJ rather than the Fed

December 14, 2017

Due its actual economic structure, South Korea should be more worried about BOJ’s extremely lax stance than about monetary policy normalization by the Fed.

This opinion piece was published in:

As the South Korean economy has grown to become the fourth largest in Asia, its fortunes have become increasingly intertwined with those of Japan and to be less influenced by the U.S. With Tokyo and Washington embarking on opposite courses in monetary policy, Seoul should be watching the Bank of Japan more closely than the U.S. Federal Reserve.
South Korea’s economy has been one of the best global growth stories of the past four decades. The country has transformed its economic structure, gradually reducing its dependence on industrial production and expanding its technology and services

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Chinese banks: An endless cat and mouse game benefitting large players

September 26, 2017

As deleveraging moves up in the scale of objectives of the Chinese leadership, banks now face more restrictions from regulators. As a result, banks have been very creative in playing the cat and mouse game in front of evolving regulations.

Ever-changing sources of funding in regulatory whirlpool
When one door closes, another one opens up. As deleveraging moves up in the scale of objectives of the Chinese leadership, banks now face more restrictions from regulators. In any event, this is not the first time they find themselves in the regulatory whirlpool. From the usage of repo agreements to wealth management products (WMPs), and most recently negotiable certificate of deposits (NCDs), banks have been very creative in playing the cat and mouse game in front of evolving regulations.

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Is China Deleveraging? Too Early to Cheer

September 13, 2017

This blog post was originally published on BRINK “Deleveraging” is the new buzzword in China. The leadership clearly wants to scale back its epic borrowing, but it is not necessarily ready to pay the price for it, namely, the price of having less support for growth. The question is whether the recent efforts of China’s leadership to […]

This blog post was originally published on BRINK

“Deleveraging” is the new buzzword in China. The leadership clearly wants to scale back its epic borrowing, but it is not necessarily ready to pay the price for it, namely, the price of having less support for growth. The question is whether the recent efforts of China’s leadership to force the deleveraging of its economy are bearing fruit.
Among China watchers, the most optimistic have announced the

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ASEAN Against the World: Strength in the Numbers

July 19, 2017

Corporate debt in emerging markets has long been perceived as a relevant risk for the global economy. In reality, this perception might be true for some large emerging economies, especially China, but not for its neighboring countries, namely those in the Association of Southeast Asian Nations (ASEAN) region.

There are several reasons why ASEAN economies are becoming increasingly appealing for investors, such as positive population trends and relatively large GDP size. In terms of population, if ASEAN were a single economy, it would be the third-largest market globally. Furthermore, their working population is growing, in contrast to North Asia, from Japan to Korea and, of course, China. This means ASEAN economies should benefit from a growing middle class for a longer period of

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Other than climate change, can anything else unite Europe and China against Trump?

June 2, 2017

Some instant takeaways from the EU-China Summit. A timely show of unity, but little real change in interests.

After a short but fruitful visit to Berlin Li Keqiang is now reaching the end of his trip to Europe, attending the EU-China summit in Brussels.
In Germany, Li left with a 2.7 billion gift in the form of Deutsche Bank’s commitment to invest in the Belt and Road Initiative.  In addition, the “reciprocity” concerns generally raised by the German government regarding China seemed to have been less prominent during this bilateral summit. The reason probably lies in Merkel and Li’s joint attempt to appear as the saviorus of multilateralism against an increasingly isolationist Trump.
In Brussels, China and Europe’s seemingly united vision of global priorities looked even more real

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China cannot finance the Belt and Road alone

May 12, 2017

The One Belt One Road initiative holds great promise for the global economy, but will need a huge amount of finance. Initial presumptions that China would be able to provide all the finance are now unrealistic. Other partners should consider providing finance for some aspects, especially Europe – which has a lot to gain from the project.

There is no doubt that Asia needs infrastructure. The Asian Development Bank (ADB) recently increased its already very high estimates of the amount of infrastructure needed in the region to 26 USD trillion in the next 15 years, or 1.7 USD trillion per annum (Chart 1). The great thing about the China driven Belt and Road initiative is that it aims to address that pressing need, especially in transport and energy infrastructure. But this is easier

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China’s rising leverage is a growing risk

May 12, 2017

Worries about the growth in China’s leverage are on the rise. Is this growth in leverage sustainable? Alicia García-Herrero finds that the evidence is not so positive so far.

Worries over China’s rising leverage have been growing, especially since the country’s ratio of debt to gross domestic product surpassed 250% in 2016. This figure might appear reasonable when compared with developed countries, especially Japan and members of the European Union, but such a comparison only masks the different reality China faces.

China’s GDP per capita is still much lower than that of developed economies, and a good part of its population, as well as many of its small and midsize enterprises, do not yet have full access to credit. Further financial deepening — an increase in the availability

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China banks in 2017: No rebound in sight, rising risks for smaller banks

February 6, 2017

Alicia García-Herrero finds it unlikely that risk in the Chinese banking sector will abate any time soon. And the worries are strongest for smaller institutions. However, the chances of a total crisis are low, and proactive decisions now could pay dividends in the medium term.

This opinion piece was original published by Asian Banking and Finance.

China bank risk is on the rise. The unwavering focus by both markets and regulators – ranging from individual banks to financial system stability as a whole – reflects a sense of urgency that actions are needed to contain the risk. This is no easy job. And at least in the government’s mind, it requires not only a trade-off between short-run profitability and long-term system risk of commercial banks, but also balancing the interest between different players in the financial industry, for example, insurers and asset management corporations (AMCs).
This also explains the creativity on risk shifting through repeated tightening and loosening of policies, and the ultimate outcome favors banks the most. In fact, both markets and regulators have come up with different ways to survive in front of challenges. The usage of investment receivables and wealth management products (WMPs) are initiated by banks, but these channels are likely to be further restricted.

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CFETS will show which way the Renminbi is heading during the US dollar bull

January 24, 2017

Currency watchers are sometimes baffled by the role of the CFETS in regulating the relation of RMB to the US Dollar. However, the recent history of CFETS gives some clues over what to expect in the coming months if USD continues to rise.

The idea for a RMB exchange rate basket has long been in the air in China. However, it is only since December 2015 that it become a part of the toolkit used by the People’s Bank of China (PBoC). At that time, a very strong USD was not sufficient to boost China’s competitiveness, because China’s trading partners depreciated even more against the greenback. Focusing investors’ attention on the RMB’s loss of competitiveness against trading partners was the key reason for the launch of a new basket, namely China’s Foreign Exchange Trade System (CFETS).
The PBoC’s addition of CFETS to its toolkit has certainly increased the PBoC’s freedom. In fact, when looking at the RMB’s recent evolution, against both the USD and CFETS, it seems quite clear that the RMB has been chasing the weaker of both, mainly depending on the USD cycles. Three periods can be clearly identified when we analyse the movements of the RMB.
(1) The first period began with the announcement of CFETS and continued until the USD started weakening in January 2016. During this time the RMB tended to remain relatively stable against CFETS, but moved relative to the bull dollar.

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Japanese banks and US$ liquidity: Squeezed between expensive deposits and the BoJ

November 28, 2016

For the last few years, Japanese banks have aggressively expanded their assets overseas, which has helped increased their stubbornly low profitability even after the introduction of negative interest rates by BoJ. Such a successful overseas strategy, profitability-wise, may be at risk due to US$ liquidity developments at a global level.

In fact, US$ liquidity has been ebbing towards tightness, partially because of the reform of the US money market fund and more is to come as the FED hikes rates.
The major source of US$ funding for Japanese banks used to be the US money market funds (MMF), but with its reform last year, the liquidity has dried up massive so that Japanese banks have turned to other sources of US$ liquidity. The reason for the increase in the cost of funding is not only that the LIBOR is already discounting incoming FED hikes but also that the cost of Yen-US$ cross-currency swaps has surged.
The most important source of US$ liquidity for Japanese banks now is wholesale US$ deposits but the cost of funding has also gone quite rapidly. Against such background, the Bank of Japan has been offering limited amounts of US$ liquidity through different facilities.
The first one is the BoJ’s Growth Program, which is designed to offer US$ liquidity to Japanese banks to expand their overseas operations but within a limit and only for growth-enhancing lending.

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