What Trump's policies will mean for China's economy

FROM an Asian perspective, there are potentially three new US policy directions (under President-elect Donald Trump) that are relevant to China's growth, policy and reform outlook this year: trade restrictions against China, protectionism, and isolationism.

China's possible reaction (I): Allowing the yuan or renminbi to drop sharply as retaliation is unlikely, in my view. At this stage, Beijing's overriding policy objective is stability. The People's Bank of China (PBOC) policy is to keep a stable trade-weighted exchange rate, not large currency devaluation. A sharp drop in the yuan would give the wrong signal to structural reform. It would also create international chaos, leading to a "lose-lose" situation.

China's possible reaction (II): Dumping US Treasury bonds is also unlikely because such an action could trigger selling by other players, many of whom are already starting to question the outlook for the US's twin deficits. Massive selling of US Treasuries would hurt Chinese reserves valuation significantly.