US-China trade wars get uglier

The US-China trade war is a topic that I haven’t focused on for quite a while, but recent developments lead me back to this grossly disturbing saga as it again spills over to impact global markets adversely.

In the latest turn of events, on Monday the US formally accused China of being a currency manipulator. This took place after China allowed its currency – the renminbi/yuan – to fall to 7 to the US dollar level. This is the first time since 2008 that the RMB has been at this low level – which is very much a psychological threshold as seen by the markets. This also prompted the US administration to say that China was using its currency to gain an unfair advantage in trade, and for President Trump to go into overtime on twitter. 

It is a development which has certainly hit the global stock markets as they fell pretty much across the board; but in fairness, some markets were coming off close to record highs. However, it has rattled investors, and the White House. But the move also sees quite a divided range of opinions as to why the People’s Bank of China (PBOC) has made this latest RMB fix. Some analysts see it as a way for China to counter the trade wars and the increasing tariffs imposed by the US on Chinese goods, others see it as Beijing’s way of dealing with a much more complex range of economic issues.

The effective devaluation of the RMB, as the US is calling it, comes following Trump’s announcement last week to impose a new round of 10% tariffs on $300 billion worth of Chinese export goods not already subject to tariffs. By all accounts Trump overruled objections from his trade team on this – and apparently only Peter Navarro, a China hawk, did not object. And oddly it also came while Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer were in Shanghai last week in an effort to restart stalled trade talks.

So, on the face of it, following successive rounds of tariffs from the US since mid-2018, the currency fix by PBOC can be seen as one way of loosening the squeeze being applied. And it can also be seen as Chinese retaliation – something which Beijing has held off on for some time. The lower value of the RMB makes Chinese exports cheaper and helps it offset the impact of US tariffs. But all this is only part of the picture, and one has to ask why Trump was so insistent on further tariffs at this time?

One thing that Trump is particularly good at is winding up a particular ‘box of tricks’ to eventually get what he wants – seemingly regardless of the fallout damage. And with Trump trying to push the US Federal Reserve for aggressive rate cuts to help boost the US economy, his actions on further tariffs against China raises the question if this was all part of the process? Seems somewhat unlikely – maybe. 

But what it has done is allow Trump to ramp-up his diatribe against China. In a tweet on Monday, Trump fired: “China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

As already noted, this was followed by the US Treasury designating China as currency manipulator, a historic move that no White House had exercised since the Clinton administration. In a statement, the US Treasury said: “Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a currency manipulator. As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund (IMF) to eliminate the unfair competitive advantage created by China’s latest actions.”

But this is not expected to lead to any formal penalties, even though the US has to put its case to the IMF, and should be seen as more of a rebuke to China and of course as part of the further escalation in the ongoing US-China trade war.

Many analysts anticipate a further slide the RMB-dollar exchange rate, with a potential stabilisation at around 7.5 RMB to the dollar – over time. But China is certain to keep a tight rein on the process. Many analysts are in agreement that to date China has been keeping the RMB artificially strong as a contender for a global currency, so the current tail-off will suit different purposes for Beijing. In particular, apart from making Chinese exports cheaper, in theory it will also help to discourage capital flight – something Beijing has been worried about for some time.

US agri gets a bigger headache

One area where US exports have been particularly hurt hard by the actions of the US administration is in its agri-products exports to China. The reciprocal tariffs imposed by China impacted US farmers so much that the US administration has had to supply farmers with extensive subsidies. However, this picture just got a whole lot worse when on Monday Beijing instructed state-owned companies not to buy US agri-products.

The US Agriculture Department had forecast American farm exports to China at just $6.5 billion in fiscal 2019, which ends 30 September. That is down from $16.3 billion last fiscal year and from more than $20 billion annually when Barack Obama was president. The picture now looks so bleak that the administration will have to dramatically increase its current $16 billion bailout to US farmers.

One US business and agricultural group coalition, called Tariffs Hurt the Heartland, called on the US and China to return immediately to the negotiating table before more US farmers, workers and small businesses are further hurt by the trade wars. Jonathan Gold, a spokesperson for the group, said in a statement: “It’s never been more clear that tariffs are a failing strategy. Behind today’s market turmoil are real Americans who have been used as bargaining chips in this trade war".

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