$20bn US-China finance pledge to boost trade

05 December 2008 07:22  [Source: ICIS news]

By Pearl Bantillo

SINGAPORE (ICIS news)--The $20bn trade finance pledge by US and China is a welcome development that should boost economic activities amid the global credit crunch, a chief economist at Deutsche Bank said on Friday.

China and the US will be raising their annual trade financing by more than 50% with the new commitment, which is seen as a relief to flagging Chinese exports that have been dragging down Asia’s biggest emerging economy.

“It reflected the active cooperation between the US and China amid the economic downturn. The trade finance will help exporters to have better cash flow,” said Ma Jun, Hong Kong-based chief economist at Deutsche Bank.

“It is good news for export trading,” said Ma.

The US was China's second-largest trading partner last year, with bilateral trade totalling $302.8 billion, according to China Customs.

The additional funds should “support trade flows during this period of financial turmoil,” said US Secretary Henry Paulson in his closing remarks in the 5th round of US-China Economic Strategic Dialogue in Beijing.

“We are both committed to strengthening the global economy,” Paulson said.

The funds will be provided by the export-import banks of the two countries and are intended “particularly for creditworthy importers in developing economies,” Paulson said, while underscoring the significance of global trade to the overall health of economies.

“The Chinese economy, like the U.S. economy, depends on global trade, and China is stepping up its efforts to promote global growth and stability,” he said.

China’s exports growth has been slowing as the US, its major trading partner has been sinking neck deep in financial troubles since the subprime crisis broke out last year.

US imports were slowing as consumers tighten their belts given the growing jobless count as companies struggle to survive by cutting costs. The pullback on consumption has taken its toll on the US economy, which has been in recession for over a year now according to National Bureau of Economic Research (NBER).

"We hope the US side will take the necessary measures to stabilize the economy and financial markets, as well as to guarantee the safety of China's assets and investments in the United States," China’s vice premier Wang Qishan said in a speech.

With the sharp slowdown in global demand for consumer items, China is expected to post its weakest annual GDP growth in 2008 after five consecutive years of double-digit growths.

The decline in petrochemical imports into China underscored the sharp slowdown in the country’s export-oriented manufacturing activities as demand started to wane. The November purchase management index (PMI) declined to 38.8%, suggesting contraction in industrial output.

Recent adverse economic developments have forced China to reverse its monetary tightening policy and aggressively slashed interest rates, the latest one being the 108 basis points cut in its one-year lending and deposit rates.

The country also introduced a CNY4,000bn fiscal stimulus package to boost consumption and support infrastructure projects through to 2010.

Meanwhile, Paulson cited the need for China to allow its currency to gain further ground against the US dollar during the two-day dialogue, highlighting “the importance of a market-determined currency in promoting balanced growth in China that will contribute to a healthy global economy.”

Chinese officials, on other hand, maintained that the country is committed to a stable yuan.

“Certainly Chinese authorities would want a weaker currency to stimulate exports,” said Thomas Lam, treasury economist at Singapore’s United Overseas Bank. It would be difficult to gauge if the recent weakness has to do with official intervention or with natural market forces weakening the yuan, he said.

“I think it is absolutely crucial not to artificially depreciate or weaken your currency because that is going to create a pressure on other nations,” Lam said.

($1 = CNY6.88)

Judith Wang contributed to this story.

By: Pearl Bantillo
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