Trade War Doldrums

Avatar di Gianluigi Raimondi 14 Agosto 2019 | 13:30

A cura di Walter Snyder, Swiss Financial Consulting

Recent developments in the China-US trade war have not been encouraging. When the American delegation returned from Beijing without having made any progress in negotiations towards the end of July, President Trump announced the imposition of tariffs on the remaining $300 billion of Chinese goods imported into the US. This action marked the end of the truce in the trade war and not unexpectedly brought about a Chinese reaction that consisted of a total block of the purchase of American agricultural products by state enterprises. That means American farmers will have to deal with a $19 billion decrease in revenue. President Trump claims that he will help the farmers, and they certainly need help now.

The Chinese also let the renminbi depreciate slightly in value as it went from 6.88 to 7.06 and is currently trading above the critical psychological 7 level as of Tuesday, 13th August 2019, at the time of writing. It looks like the PBoC has the exchange rate fully under control.

The decision of the Trump Administration to declare China a currency manipulator is like the pot calling the kettle black. President Trump has long been insisting on having a weaker dollar to help exports and diminish the trade deficit in goods, which is over $800 billion. He blames the Fed for not being proactive in promoting a weaker dollar.

Historically it is of course the case that China has been a currency manipulator with the most egregious case being the devaluation that took place at the end of 1993. The renminbi went from 5.8200 to 8.7200. This devaluation can be considered decisive for promoting the Chinese economy, and the PBoC supported this level for over a decade. This is a clear case of a competitive devaluation.

The recent weakness of the renminbi can be attributed to market forces since the currency strengthened about 10% when there were still prospects of a trade deal but then weakened about 10% when it seemed that a trade deal was not in the offing. The most recent weakness can be ascribed to the surprise that President Trump sprung on the Chinese last week. It now looks like the new USD/CNY exchange rate is going to be slightly over 7.00, and it is clear that the Chinese have sent a signal to the US that the recent moves by the Administration are not to Beijing`s liking.

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