What’s $145 billion between friends? Narendra Modi may be wondering as his bromance with Donald Trump risks costing India some real money.
The reference here is to New Delhi’s store of US Treasury securities. It has the eighth biggest pile of foreign exchange reserves, and it’s Asia’s No. 5 dollar holder. What’s interesting, though, is the extent to which India’s dollar hoard grew in 2017—by 23%, almost twice as fast the increase by Beijing.
China’s purchases are getting lots of attention at the moment. Not just because it’s Washington’s biggest banker, but because it’s going in the opposite direction of banker No. 2: Japan. Whereas China added $127 billion to its Treasuries heap in 2017 (India added $27 billion), Japan scaled back to the tune of $30 billion. Yet, before long, officials in Beijing and New Delhi will realize Tokyo is on to something.
Part of Japan’s trepidation is the Federal Reserve. It’s still deeply perplexing that President Donald Trump showed Janet Yellen, one the best Fed chairs the US ever had, the door. Trump’s pick, Jerome Powell, is a wild card. Japanese Prime Minister Shinzo Abe’s government will be scrutinizing Powell’s every syllable when he speaks before Congress on 28 February. Adding to the uncertainty: how a new Fed leader reacts to recent jumps in US wage and inflation data.
The even bigger threat is Trump himself. His fiscal promiscuity worries Abe’s foreign-exchange managers in Tokyo. Trump’s Republican Party is borrowing $1.5 trillion from future generations to give a tax cut to billionaires today, one the economy doesn’t need. It’s “fiscal overkill", as strategists Krishna Guha and Ernie Tedeschi of Evercore ISI in Washington put it.
Next up: Trump’s $4.4 trillion budget proposal and plans to roll out a titanically large infrastructure plan. While this White House may be “conservative", its spending ambitions would make socialists blush—and creditors nervous.
China, it’s worth noting, has been on to Washington’s profligate ways for some time now. As far back as March 2009, Beijing was voicing explicit warnings to US lawmakers. The breaking point: budget-busting bailouts to stem the fallout from Wall Street’s near collapse. “We have made a huge amount of loans to the United States," then-Premier Wen Jiabao said. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried." He called on Washington “to honour its words, stay a credible nation and ensure the safety of Chinese assets."
Wen’s concerns proved prescient. In August 2011, Standard & Poor’s yanked away America’s AAA rating, shaking global markets.
So why are his successors—Premier Li Keqiang and President Xi Jinping—upping their US exposure? For now, it’s about capping a rising yuan. But that strategy may be futile as Trump scraps a 23-year-old strong dollar policy.
Last month, US treasury secretary Steven Mnuchin made clear that Trump’s past comments about the yuan/dollar exchange rate “killing" and “raping" us were not aberrations. The yen is the most obvious example of collateral damage, surging 6.5% versus the dollar so far this year. But any further drops in the dollar will boost bond yields, raising many an eyebrow in Beijing, Tokyo and New Delhi.
The real turmoil, though, could come from the goods-and-services trade channel. On 22 January, Trump put some meat on the bones of a trade-war strategy he telegraphed on the campaign trail. The first wave—tariffs on imported solar panels and washing machine—was but a flesh wound. It’s a harbinger of bigger action aimed not just at China, but Asia in general.
Particularly ominous are Trump’s threats of “reciprocal tariffs" even on what he terms “so-called allies". It’s not clear what Trump plans, but any leader who thought they had a rapport with the mercurial US leader—be it Abe, Modi or South Korea’s Moon Jae-in—should brace for the worst. Modi, for example, could cut India’s losses and sell Treasuries. But that would surely enrage Trump, putting India in his line of fire. And China could easily retaliate with exit taxes on goods manufactured on the mainland, by clamping down on the operations of foreign companies or dumping its $1.2 trillion of Treasuries.
There’s also reason to worry that Trump’s pre-White House tactics will colour his judgement. In his property-developer days, Trump filed for Chapter 11 bankruptcy protection at least four times. Somehow, Trump kept a straight face in June 2016 when he said: “I’m the king of debt. I’m great with debt. Nobody knows debt better than me. I’ve made a fortune by using debt, and if things don’t work out, I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing."
Washington’s Asian bankers may disagree, especially since Trump has hinted at doing the same as president. Where that leaves Xi, Abe and Modi as 2018 unfolds is anyone’s guess as the Trump risk mounts. But hey, what’s $145 billion between pals?
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.