(Yicai Global) Dec. 12 -- US president-elect Donald Trump's support for tax cuts enhanced the market's expectations for inflation, accelerated worries over the Federal Reserve rate hike and brought great uncertainty to the world as well as China, Zhu Min, former IMF Vice-President Zhu said.
"If the interest rate curve goes up rapidly, then the world's assets will be re-allocated. This is a huge risk. Every one percentage point rise or fall in the US economy will lead to 0.5 percentage points on Saudi Arabia and 0.35 percentage points on China. The impact is enormous," said Zhu, at an economic development forum held in Shanghai.
Zhu believes much of Trump's economic policy is pre-determined. "In his campaign, he made numerous promises about economic growth. Three of which he will implement after taking office are tax cuts, trade protectionism and increased investment in infrastructure construction." he said.
It remains to be seen where the money will come from if taxes are cut while financial expenditure is expanded. "In the Trump era, the US fiscal deficit may widen and the US current account deficit is expected to worsen by 3.5 to four percentage points. The US may return to a fiscal and economic 'double deficit', as before the economic crisis. Then the USD may go down," said Zhu.
"When the US needs to expand its fiscal deficit, it will face a debt ceiling set by Congress. To break that threshold, the government will have to go to Congress to ask for more lines in the sand," added Zhu.
"Trump's administration will once again face this situation and the key moment is March 15, 2017, when the previous debt ceiling will expire. It will be a political contest, but it also carries huge uncertainty."
"In the Chinese economy and enterprises, the US is on the demand side and China on the supply side. As the "Trump phenomenon" is likely to be unsustainable, the US will experience a period of a strong dollar and economic growth, followed by a weak dollar and falling growth. If China's supply side continues to move forward, it will stay at a very low level," Zhu said.