Yuan has fallen some 10% since April when Trump announced tariffs on China with $34 billions worth of goods now to be subject of 25% import taxes beginning tomorrow at 4AM London time.
In a move JP Morgan called “nearly unprecedented” and “only comparable in magnitude to the August 2015 devaluation,” Yuan fell around 4% just since mid-June.
“Policymakers believe some yuan depreciation is okay, but they don’t want to see it falling below 6.9. Appropriate currency depreciation is needed given that the economy faces downward pressure,” one Chinese policy insider said according to reuters.
“The yuan is a heavily managed currency, far more so than that of any other major economy (and a great number of smaller ones, for that matter). Very little happens that the PBOC doesn’t want to happen. It exercises significant control, even in calm times. This is not the ‘invisible hand’ of the free market,” Daniel Moss of Bloomberg opines.
As can be seen above, Yuan has fallen against the dollar from nearly 6 to the dollar in April to now needing 6.6 per dollar.
As the currency does not free float like the euro or pound, China’s government appears to have made a policy decision of devaluation to off-set some of the import taxes that begin tomorrow.
Once taxes start applying, Chinese officials have said they will send their own list of $34 billion in tariffs against American goods.
If they do that, Trump has said he will add tariffs to another $200 billion worth of Chinese goods. Yet at the G7 he said:
“No tariffs, no barriers, that’s the way it should be. And no subsidies, I even said, not tariffs.
Ultimately that’s what you want, you want tariff free, no barriers, and you want no subsides because you have some countries subsidizing industries and that’s not fair.
So you go tariff free, you go barrier free, you go subsidy free, that’s the way you learned at the Wharton School of Finance.”
To reconcile those two statements we can only think of megaphone negotiations. Yet whether he is truly working towards a world where there are no import or export, implicit or explicit, taxes, we do not know.
What we do know is that Shanghai’s stocks have effectively crashed, down almost one thousand points (~25%) since February and down some 10% since June in pretty much a straight line to new lows:
Some US stocks that depend on Chinese manufacturing have also suffered, Apple chief amongst them. Starbucks also stands out for effectively falling off the cliff recently.
There might not be a China connection there for the coffee chain, but they’re opening a store in the world’s second biggest economy every 15 hours.
Cryptos, in contrast, have been somewhat bullish recently. Not quite as bullish as you’d expect in light of this stupendous devaluation because China has banned crypto-exchanges to implement strict capital controls to allow them to effectively paint the yuan price as they like, but there might be some leakage.
What happens next remains to be seen, specifically whether China will in fact apply their own import taxes.
That’s because $34 billion is a fairly small amount compared to the $600 billion trade of goods between US and China in 2017. It is not even 10% of the deficit $370 billion, with America importing from China $505 billion, and selling to them only $130 billion in exported goods.
Some specific companies may however be affected by tomorrow’s new trade taxes, but it is the $200 billion which may focus minds.
If China does retaliate tomorrow, America here clearly has the upper hand as they do not even sell $200 billion worth of goods to China. The tit for tat could even go so far as import taxes on all Chinese goods. So they might well be bluffing.
Yet what exactly is Trump’s game is not very visible at this stage. While domestically he has achieved effectively nothing now almost two years on, in the foreign arena, were he has pretty much free reign, he has been very successful.
Isis is gone. North Korea no longer rattles. There’s implicit talk of peace in Palestine by the Israeli Prime Minister. Iran might be subject of a Trump-Putin one on one meeting, although we do not know so.
There, it is clear what he wants. He wants peace. And it is notable, we should say, that Trump has stated a few times he wants peace, in significant contrast to his two predecessors.
Yet where trade is concerned, we’re becoming somewhat intrigued in wondering whether he really is working towards a no tariffs world.
The lion roars to make his strength known so as to avoid a fight. Trump might well be saying, here is what I can do if you wish to keep being protectionist or have implicit tariffs.
That might suggest the negotiations have failed, but we doubt it. It looks like they have just begun. And if they fail it may well end up with a more balanced trade relationship so then they come and maybe even beg for removal of tariffs on both sides.
Because America does have the upper edge and China has taken advantage far too much as we in this space have seen first hand when they banned crypto-exchanges yet kept the exporting crypto mining/manufacturing.
“No tariffs, no barriers, that’s the way it should be. And no subsidies, I even said, not tariffs.” -Trump.